Spanish savings banks, know as "Cajas" in most of Spain and "Caixas" in Catalonia and Galicia, are having to change their business strategies in the face of changing market conditions, say lawyers.

The Cajas are constituted to operate as non-profit making institutions with surplus funds being channelled into charitable and social projects in the region in which they are established. Cajas are supervised by the Bank of Spain and their operating regime is very protected. They may merge or sell assets to rival institutions but they cannot be taken over as a legal entity or acquired by a listed bank. The management of some is often very strongly influenced, say lawyers, by the political heavyweights who control the region where they are headquartered.

The Bank of Spain has watched their recent rapid expansion very closely. The Bank does not want conflict between the listed Spanish banks and the Cajas, lawyers say, and so is encouraging them to focus on the acquisition of financial entities outside of Spain. This is among the reasons behind the acquisition by Spain's second-largest, Caja Madrid, of 83% of City National Bank of Florida, the first acquisition by a Caja of a majority interest in a listed financial institution. Arch rival and Spain's biggest savings bank, Barcelona-headquartered La Caixa, has bought substantial stakes in Portugal's BPI and Hong Kong's Bank of East Asia as well as Morgan Stanley's wealth management business in Spain (see chart).

But further expansion of the larger Cajas is dependent on raising new capital in the same way as the listed banks, suggest some. La Caixa has already led the way by placing most of its industrial and financial holdings into a single holding company, Criteria, and then listing a third of it. Despite the stock now having lost a third of its launch value, Caja Madrid is expected to follow the same path later this year by listing up to 30% of its financial portfolio in its own holding company, Cibeles.

Caja Navarra is working on a similar listing while Valencia-headquartered Caja de Mediterráneo (CAM) is reportedly also now considering doing the same. Other smaller outfits like Asturian-based Cajastur, with a €1.3bn industrial portfolio, seem to have rejected a listing for the time being.

The smaller Cajas on the other hand are increasingly finding the going tough, say some lawyers. Many have become over-exposed to bad debt as a result of the generous mortgage loans they granted during the ten years of Spain's housing boom. Fortunately, like the rest of the Spanish banking sector, they have steered clear of exotic off-balance sheet products and so their liquidity positions, while difficult are not yet believed to be critical.

But at the same time the smaller Cajas are also being punished in the debt capital markets. The recent bond issues of Huelva-based CajaSol and Caja Burgos were secured at 140 basic points above the mid-swaps rate. Until the interbank lending market opens up again, say some, the Cajas are likely therefore to have to pay a premium to obtain the liquidity they require for day-to-day operations.

A different approach has however been adopted by CAM, which has become the first Caja to issue “cuotas participativas”. These unique listed equity instruments allow investors to receive after-tax profits but not hold voting rights. Other Cajas are reportedly closely watching how the stock performs before deciding whether to follow suit.

Asset sales are another way of improving cash levels. Caixa Galicia's balance sheet has benefited from a €750m sale and leaseback deal with Pontegadea for 41 properties. CAM is also reportedly now assessing options for its property portfolio.

Until recently the majority of Cajas relied on in-house counsel to carry out most of their legal work. The revised business strategies of many means however they increasingly now need more sophisticated advice. Lawyers at the bigger firms say that while it is difficult to break down the tradition of a Caja using just one, local, external legal adviser on an occasional basis, they are working hard to make sure this welcome new stream of work comes their way.