Smaller Spanish Societies Stumble
April 1st, 2009
Spain’s banks have been among the most robust and profitable in the world since the financial crisis began last year, but the country’s weaker lenders now face a challenging period of mergers and restructurings following the crash of the Spanish property market, according to regulators, government officials and analysts.
Unlike crisis-hit peers in the UK and elsewhere, no bank in Spain has been formally nationalised as a result of the crisis.
Spanish banks were protected by regulatory disapproval of off-balance sheet investments and by reserves of “counter-cyclical” bad debt provisions set aside in the boom years.
Santander and BBVA, the country’s two largest banks, unveiled higher net profits for 2008, earning €8.88bn ($11.8bn) and €5.41bn respectively.
As the recession deepens, however, Spanish banks and cajas – unlisted savings and loans institutions usually controlled by regional politicians – have been buffeted by rising bad loan ratios and debt downgrades issued by credit ratings agencies.
As alluded to in Unicaja Merger: First of Many in Spain?, yesterday – in the first such bank takeover since 1993 – the Bank of Spain announced that it had replaced the directors of Caja Castilla La Mancha, a troubled lender in central Spain.
The central bank will lend money to CCM, backed by a central government guarantee of up to €9bn, to solve its liquidity problems and allow it to meet obligations to depositors and creditors, the government said after an emergency cabinet meeting yesterday. It noted that CCM accounted for less than 1 per cent of the banking system.
“You had other countries like the US and the UK where banks were immediately and obviously in bad shape at the start of the crisis,” says David Stix, chief executive of Iberian Equities, a broker in Madrid. “Here, the banks started off in much better shape, but things are going to get worse.”
Government ministers are preparing a “road map” on how to proceed, negotiating with the Bank of Spain and with the opposition Popular party to avoid political arguments that could destabilise the financial system.
“My view is that this won’t produce problems that we can’t cope with,” José Luis Rodríguez Zapatero, the prime minister, told journalists last week. “It’s normal to think that after the financial crisis there will be a restructuring in the system that will affect basically the small institutions.”
Although there has been talk among bankers and investors of mergers among commercial banks – between Banco Sabadell and Banco Popular, for example – the weakest institutions are found among the country’s 45 cajas , which together comprise half of the banking system.
Some cajas are heavily exposed to the collapsed domestic property market, through loans to developers and through mortgages, lending now known as “Spanish subprime”. Few benefit from the diversification enjoyed by Santander and BBVA with their Latin American interests.
Apart from the political discussions over which party or region will control any future merged entities, there are likely to be arguments over the provision of central bank or government funds for troubled lenders.
The method favoured by the government is to raid the relevant deposit guarantee fund. But the funds are supposed to be used to compensate depositors in the event of failure. Nor do the funds, with a total of more than €7bn, have enough reserves to finance more than a handful of rescues.
Executives at both the biggest Spanish banks and the smaller cajas have, meanwhile, been using every means at their disposal to strengthen the capital of their institutions.
They have sold and leased back their offices, tried to sell their remaining industrial holdings and issued new stock – in the case of Santander, through a pre-emptive strike back in November with a deeply discounted €7.2bn rights issue.
Lastly, they have tried to limit the rise of their bad loan ratios by swapping debt for equity.
It is a far cry from the heady years before the crisis when Spanish banks were liberally disbursing loans to homebuyers and developers.
Story from Financial Times
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