Spain's €99 billion bank bail-out
News Article Date: Monday 29th of June 2009
The government announces a rescue fund for a bloated banking system
BANK bail-outs may be starting to wind down in some places, but in parts of Europe they are just getting started. On June 26th the Spanish government announced details of a rescue fund of up to €99 billion ($137.7 billion) to help the country’s banks weather a severe storm of bad loans and help restructure its bloated banking system. But implementing the plan, which has been a long time coming, will be tricky.
So far Spain’s banks have held up well, thanks to cautious regulation and a focus on traditional banking. Only one small savings bank, Caja Castilla La Mancha, has run into serious trouble. But they now face a tough couple of years. Unemployment is at 18% and rising. Profits are falling, and non-performing loans (NPLs) have nearly quadrupled in the last 12 months. The full impact of these bad loans has yet to affect earnings, for two reasons. One is that banks have been busy restructuring loans, and in many cases swapping debt for properties from overstretched developers. This flatters the NPL ratio, but may store up problems for the future.
Aahhh!! Help is on its waySecond, banks have two years to make full provision against highly leveraged mortgages or problem loans to property developers. These bad loans will hit profits some time in the next 12-24 months, says Matteo Ramenghi, an analyst at UBS. Most banks have already exhausted their thick cushion of so-called “generic provisions”, reserves set aside during the boom times. For some banks, bad debts will wipe out all their profits.
Spain’s unlisted savings banks, or cajas, which together make up half of the country’s financial system, look especially vulnerable. Controlled by local politicians, they have grown rapidly, lending generously to property developers and funding politically motivated projects. Bankers reckon there are at least six big cajas that will soon be short of capital. But recapitalising them will not be easy, mainly because they do not issue ordinary shares. As part of the bail-out plan the government can subscribe to “participatory shares” with voting rights. In return, the cajas will have to restructure, and in some cases be taken over by stronger institutions.
Spain’s banks do not just need fresh capital; they also need to shrink. The industry grew too much during the boom. The tiny high street in Aravaca, a suburb of Madrid, sports no fewer than nine banks and savings banks. PricewaterhouseCoopers, a consultancy, estimates that there are 30% more branches than are needed.
So far only the big banks like BBVA have been closing branches. But a large number of cajas may have been keeping their closure programmes on hold while waiting for the bail-out plan, says Iñigo Vega of Iberian Equities, a stockbroker. Merger plans have also been on standby. Bankers predict that the number of cajas will fall by half from the current 45. Combinations of cajas from different regions, with little branch overlap, make the most sense.
Politicians have been bickering over whether regional governments ought to have a veto over such mergers. There is a stronger argument for keeping such powers in the hands of the Bank of Spain. The central bank has won admiration around the world for keeping its charges from getting sucked into the international financial crisis, even if the bank—and the central government—did not do enough to prevent uncontrolled growth in property lending.
Spain’s commercial banks will probably wait until the dust has settled on the restructuring of the savings banks before they contemplate mergers and takeovers. The big two banks—Santander and BBVA—are somewhat protected by diversification abroad. But all banks will have to close branches, cut costs and focus on recovering bad loans.
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