Spanish banks could face a multibillion-euro bill and another blow to the sector's already tarnished reputation thanks to an upcoming ruling from the European Court of Justice on a controversial mortgage index.
Interest rates on most floating-rate Spanish mortgages have been historically based on the Euro interbank offered rate, the average rate at which European banks lend to each other. But until 2013, some were priced on the Índice de Referencia de Préstamos Hipotecarios, or the Mortgage Loan Reference Index. The index was based on the average monthly rate for mortgages and published by the Bank of Spain.
The IRPH was priced at a higher rate than Euribor, leading to claims of a lack of transparency and multiple cases in Spanish courts. The Spanish Supreme Court ruled in 2017 that the index was not abusive, but its decision has been challenged by provincial courts, and a case has been taken to the European Court of Justice. One of the court's advocates general will deliver a conclusion Sept. 10, with a final ruling expected later on in the year.
Among Spain's largest lenders, CaixaBank, which holds a mortgage book of €91.04 billion according to S&P Global Market Intelligence data, is the most exposed with €6.7 billion in IRPH-linked contracts, according to an April 30 disclosure it filed with the Spanish stock market regulator.
€20 billion exposure
Banco Bilbao Vizcaya Argentaria SA estimates its exposure at €3.1 billion, according to a stock market filing. Banco de Sabadell SA said its exposure stands at €800 million, and Banco Santander SA said its balance of IRPH mortgages is about €4.3 billion. Bankia SA did not respond to a request for its exposure.
In an interview, Pablo Manzano, an analyst at rating agency DBRS, estimated Spanish bank exposure totaled €20 billion, but he said the payout could be much larger depending on the ruling's outcome.
"This is just the tip of the iceberg," he said. "If there is retroactivity ... this is a Pandora's box because the final impact could be really, really large," estimating the sector's exposure to IRPH mortgages between 2004 and 2008 at €120 billion.
The Bank of Spain has issued a warning about the impact on the sector, especially after the 2016 European Court of Justice ruling on so-called mortgage floor clauses, which capped the interest rate on floating-rate mortgages, meaning some borrowers were unable to benefit from the fall in interest rates. Some bank clients claimed they had not been properly informed about the clauses.
"Experience in previous lawsuits, particularly those on mortgage floor clauses, indicates that these legal processes may be of significant complexity and considerable duration, as well as having a material impact of banks' profits," it said in its May 7 biannual Financial Stability Report.
Spanish banking profits are already under pressure from low interest rates, tough competition, particularly in the mortgage market, and restructuring costs as lenders move to digital banking. Legal action has also weighed on lenders, with the central bank estimating that banks had repaid €2.2 billion to customers for the mortgage floor clauses by January 2019. In 2016, lenders set aside €1.9 billion for floor clauses.
According to S&P Global Market Intelligence data, Santander, BBVA, Banco de Sabadell and CaixaBank all posted a year-over-year decline in net profit in the first quarter of 2019.
The sector's €41 billion taxpayer bailout during the financial crisis and ongoing lawsuits about selling practices have led to a great mistrust of banks in Spain.
Carlos Baos, a lawyer at Spanish law firm White & Baos, which is representing borrowers affected by IRPH mortgages, said the European Court of Justice will look to see if banks properly advised their clients that the IRPH index was indeed different from the Euribor and that they risked paying a higher rate.
Banks had used advertising using both Euribor and IRPH rates, but borrowers were not necessarily aware of the difference and of the fact they might end up paying more, he said. Banks would need to prove that they had explained that properly, he added.
"If you don't know what the Euribor or the IRPH is, you understand that they are giving you the same conditions," he told S&P Global Market Intelligence in an interview.
The legal turmoil of Spanish banks is also affecting investor sentiment, said a Spanish equities analyst who declined to be named for compliance reasons. He said there was "some concern on that front" and that it was reflected in the banks' stock performance. BBVA, CaixaBank, Banco de Sabadell and Bankia have all underperformed the Stoxx Europe 600 Banks index in the last year.
He said the sector was not certain what effect an unfavorable court ruling would mean for the banks. The IRPH index would have to be replaced by another index such as the Euribor, which could increase the payouts for lenders.
Baos said while there were fewer IRPH cases than those generated by the European Court of Justice's 2016 ruling on floor clauses, the opportunity for "substantial" payouts was higher because the difference between the Euribor rate and the IRPH amounted to between 1% to 2% a year for a 20-year mortgage at €200,000.
"A difference of 1% to 2% a year is quite a lot of money so it could be substantial claims," he said.
However, he said should the European Court of Justice rule in the banks' favor, it would take several years for bank customers to claim their money back. In addition, special courts set up in Spain to deal with abusive mortgage cases were suffering from a backlog, Baos said.
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