Spanish Banks Vulnerable
News Article Date: Thursday 05th of February 2009
Spain's banks have withstood the financial crisis better than their European peers, but their uniquely high provisions against bad debts will start to run dry unless the economy improves next year.
As big names in U.S. and European banking have buckled, Spanish banks have so far withstood defaults from failing property developers due to high provisions imposed upon them by the Bank of Spain at the end of Spain's last recession.
But in 2009 they will be hit by a fresh wave of bad debts -- this time from householders who have lost their jobs and cannot pay their mortgages. If the bad news does not end in 2010, Spanish banks could finally be dragged down by the collapse of the country's property bubble.
"If the downturn lasts through 2009 and 2010, the banks will survive the crisis. But if it extends beyond 2010, then they could be in difficulty," Domingo Miron, partner at the Accenture consultancy, said.
While leading Spanish banks have avoided the huge losses posted by other global institutions in 2008, and even reported respectable profits, they have sacrificed some earnings to increase loan loss provisions and dipped into their so-called generic provisions cushion.
"The chinks in the armour are showing and the banks are using generic provisions as bad loans soar. 2009 is going to be a hard year," banking professor and former Dean at the Esade Business School Robert Tornabell said.
JP Morgan analysts expect most banks to opt for accelerated use of their provisions cushion throughout 2009 and 2010 as asset quality deteriorates.
Of the banks which have reported 2008 results so far, Citigroup analysts highlighted high provisions of 462 million euros (320.47 million pounds) at Popular (POP.MC), driven by the steep rise in "voluntary" provisions and property assets impairments.
JP Morgan expects Popular's generic provisions to be enough for the rest of 2009.
Sabadell SAB.MC has not released any of its generic provisions as yet -- using capital gains from asset sales to boost provisioning. But JP Morgan believes it will follow its peers in 2009 and 2010 and begin using its rainy day fund.
In the wake of Spain's last economic downturn in 1993, the Bank of Spain obliged all banks and savings banks to set up a special provisions fund to cover future loan losses.
The fund was charged against results and calculated by each institution as a percentage of their total lending.
This provisions cushion has remained mostly intact in the case of all the banks since the regulation was implemented as Spain enjoyed years of an economic bonanza.
Thanks to this, investors have not given Spanish banks nearly so hard a time as they have their foreign rivals.
Shares in Spain's biggest bank, Santander (SAN.MC), lost about 43 percent of their value in 2008, and its nearest rival, BBVA (BBVA.MC), slightly more at 48 percent. In comparison, Citigroup (C.N) has sunk almost 90 percent, RBS (RBS.L) 93 percent and Deutsche Bank (DBKGn.DE) has retreated 73 percent.
Nonetheless, the government, which has only had to provide a fraction of the amount of aid to banks compared with elsewhere in Europe, and has not had to take shares in any institution, has warned that consolidation in the sector is likely.
While the Spanish banking system has dodged the U.S. subprime bullets over the last 18 months, bankers now face a home market in which unemployment has nearly doubled to nearly 14 percent and is still rising fast.
"The property-related loan losses have now been more or less absorbed by the main banks .... they are almost a thing of the past. The problem in 2009 will not be property sector-related bad debts, but mortgage defaults as unemployment soars," Miron said.
But the banks can still report profits even with a bad loans ratio of between 7 and 8 percent, he said.
The bigger banks that have announced 2008 results so far have reported non-performing loans ratios of 1.4-2.8 percent, although Spain's second largest savings bank Caja Madrid CAJAM.UL sent shivers down spines when it forecast a ratio of 7 percent for this year, up from 4.87 percent end-2008. The Bank of Spain says an NPL ratio of 9 percent will represent a stress test for the banks, although it thinks they have sufficient generic provisions and capacity for one-time gains from potential asset sales over the next two years to survive.
"I think that is over optimistic ... In February some banks will have already exceeded a ratio of 4 percent," Tornabell said.
"And we will see increasing amounts of bad debts in the next six months. In my opinion the ratio of doubtful assets to total credit could be on average about 5 percent," he said.
The banks themselves have been upbeat about how long their generic provisions can see them through the crisis, with BBVA, Popular and Banesto (BTO.MC) forecasting their provisions will last through 2009 and 2010.
Miron ruled out any Spanish bank requiring a government bailout, so long as the economy begins to improve by 2011.
A leading U.S. asset manager agreed, although he said Spain's savings banks, which are more exposed to the Spanish property market, are "definitely suffering."
"But the Bank of Spain would push for consolidation in that sector before any bailout was necessary," he said.
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