Better late than never
Spain’s latest bank reform deserves two cheers. The country has finally owned up to the fallout from its housing bust by requiring lenders to set aside an extra 50 billion euros to cope with possible losses on their 323 billion euros of exposure to property developers. While this will help, the deteriorating economy means more provisions will be needed. The bigger listed banks can cope, but the state will still be on the hook for part of the cleanup.
The extra buffer will double the overall coverage of dud real estate loans to 55 percent, according to Cheuvreux estimates, which is a decent cushion. But that figure is based on balance sheet figures from June 2011. While the government has also asked for banks to set aside around 10 billion euros against property loans that are currently still good, Spain’s economic slide means problem loans are continuing to pile up – and not just in real estate.
Spain’s listed banks, which account for 65 percent of the system, will have to find an additional 18 billion euros in provisions and capital, according to Barclays Capital estimates. Big groups like Santander and BBVA can handle the burden, though they may have to defer the cleanup until after June deadline set by European regulators for boosting capital ratios. Bankia, which some analysts estimate faces potential extra provisions of between 5 and 7 billion euros, also says it can raise the funds on its own, but this looks more doubtful.
The government is also attempting to spur consolidation by giving merging banks an extra year to make the provisions. This will help domestic lenders such as Banco Popular and Banco Sabadell, which are already in the process of combining with other banks, and will provide an incentive for strong players to acquire the weaker ones. That would reduce the cost of taxpayer bailouts. However, as merging banks will also have the option of receiving fresh capital from Spain’s bailout fund, the government will still have to chip in.
In the short term, the new rules won’t encourage over-indebted households and companies to borrow more. And international investors are unlikely to return until Spain can show its sovereign debt is under control and implements other economic reforms. But ultimately, Spain’s financial system should emerge stronger from the overdue cleanup.