Changing landscape of Spanish banking
News Article Date: Wednesday 17th of June 2009
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Spanish financial institutions, which have with one exception ridden out the global economic storm intact, are bracing for a difficult summer and will soon be offered aid from a multi-billion euro rescue fund hurriedly being assembled by the government.
With every passing week, more Spanish ministers, bankers and analysts accept that the weakest of the country's 45 cajas , the unlisted regional savings banks, will need to be merged or recapitalised or both in the face of an intolerable burden of bad loans arising from the collapse of Spain's housing market.
On Monday, PwC, the accounting firm, said it would be necessary to invest €25bn ($35bn) to €70bn - or 2-6 per cent of gross domestic product - to recapitalise the Spanish financial sector this year.
The government's plan, in outline, is for a €9bn fund to be called the Fondo de Reestructuración Ordenada Bancaria (Frob) that would be able to leverage itself 10-fold with the help of state guarantees and to deploy up to €90bn for rescue operations. Elena Salgado, finance minister, wants the law to form the fund to be passed this month.
Bad loan rates for the financial sector as a whole have almost quadrupled in the past year to reach 4.27 per cent of assets. They are expected to double again to 8 per cent by December.
To date, the only Spanish financial institution to need a state bail-out in the current crisis was the relatively small Caja Castilla La Mancha (CCM).
In March, the authorities made available up to €9bn in emergency liquidity for CCM and replaced the directors with central bank nominees.
Despite deep recession and a surge in unemployment to more than 4m, Spanish banks and cajas have proved robust in contrast to peers in the US, the UK and much of continental Europe.
They focus almost wholly on retail operations, rather than investment banking, and were prevented by regulators from investing in the risky, off-balance sheet assets that wrecked others. They have also benefited from a cushion of counter-cyclical "generic" bad loan provisions built up during previous years of profits.
Banks and cajas , however, are heavily exposed to Spanish property by loans to developers and mortgages to homebuyers.
Many cajas are politicised institutions that overextended themselves by financing local projects of dubious value. Generic provisions are being run down rapidly.
The news that the bad loan rate among cajas had fallen slightly in March from the previous month - to 4.78 per cent of assets - made analysts sceptical.
Lower interest rates have reduced pressure on borrowers, and the government's fiscal stimulus projects, combined with seasonal summer work in tourism and on farms, have temporarily eased unemployment.
But the figures look better largely because banks and cajas are frantically refinancing their customers, buying property and swapping debt for equity - effectively shunting the problem into the future by becoming owners of devalued real estate and of troubled real estate companies.
A report last month by Santiago López Díaz, banking analyst at Credit Suisse, said listed banks alone had bought about €9.5bn of property in the past 15 months, while the cajas had probably purchased even more. It concluded that part of the debt-to-asset swaps should have been accounted for as bad loans.
Moody's, the credit rating agency, took a similar view, saying properties bought from distressed borrowers "should be considered as 'non-earnings assets' subject to future impairment".
Spanish bankers, regulators and politicians in any case all reluctantly agree the time has come to reform the country's banking system, to reduce its size and cut costs. With some 40,000 branches, Spain is one of the world's most overserviced countries.
The process has begun. Banks are cutting staff and various cajas are investigating mergers. The outcome will probably be the strongest banks will seize a larger share of Spain's market. Santander and BBVA, the two biggest, were singled out this month by a Deutsche Bank analyst as likely winners.
"We're going to see a complete change in the banking landscape in Spain," says a Spanish banking analyst.
The system, Ms Salgado said, will be strengthened: "We'll have fewer but more solid financial institutions."