Spanish Banks Face Higher Provisions
February 26th, 2010
The Bank of Spain is expected to increase the provisions it demands of Spanish lenders to cover property bought from struggling real estate developers.
The central bank’s move would further dent bank profits already hit by economic recession, according to financial sources and bank analysts.
In November, the central bank raised its provisioning requirement from 10 per cent of the property’s value to 20 per cent for real estate held more than a year, and is now expected to raise it to 30 per cent.
However, it has yet to notify lenders formally. “No decision has been taken yet,” the Bank of Spain said on Monday.
The probable change reflects a growing awareness among regulators and investors that Spanish banks and cajas, the unlisted savings and loan institutions, have massaged their bad loan ratios by refinancing property developers in exchange for Spanish property and equity in the companies, instead of allowing them to collapse.
Iberian Equities, the broker, estimated on Monday that listed Spanish banks had property assets of more than €12.6bn ($17.1bn) at the end of last year, while the cajas held €33bn.
Santander and BBVA, the two biggest banks, have taken impairments of about 30 per cent. But the proposed increase in provisioning requirements would amount to €1bn, or a fifth, of 2010 profits for smaller banks, and €5.3bn-€5.9bn, or a fifth, of profits for the cajas, Iberian Equities said.
A flurry of recent debt-for-assets and debt-for-equity swaps – involving developers including Colonial, Reyal Urbis and Metrovacesa – has deepened the scepticism of analysts and investors about the true bad loan positions of Spanish lenders. Total exposure to developers is €324bn.
“While banks’ doubtful domestic loans have risen quickly over the last two years, the recognition of impaired assets has been far slower than the severity of the recession might otherwise suggest,” wrote Jamie Dannhauser of Lombard Street Research.
There are particular suspicions about the way the collective bad loan ratio of the cajas has reached a plateau and started to decline, down to 5.05 per cent of assets in December.
That is only slightly higher than the 5.02 per cent figure for the banks, whose accounts are generally more transparent.
If the numbers were correct, that would be the “best news on the Spanish economy I’ve heard for a long time”, said Luis Garicano, professor of economics and strategy at the London School of Economics, in a blog on Spain. “Personally, I don’t believe it. The alternative is that the bad loan numbers of the cajas don’t make a lot of sense.”
Prof Garicano said it would not be possible to re-establish the credibility of the financial system if the regulator permitted “these accounting games”.
The Bank of Spain’s expected tightening of its provisioning requirements could go some way towards defusing such criticism.
Story from FT.com
