A new Spanish law on repaying borrowers who courts have said were overcharged on their mortgages will carry upfront costs for lenders, but it could help draw a speedy and relatively inexpensive line under an issue that otherwise could have been quite protracted, analysts said.
Spanish banks have faced the threat of billions of euros of provisions after Spanish and European courts ruled that they should compensate customers who signed up for mortgages with floor clauses and lost out on a drop in interest rates. The clauses impose a lower limit on the interest rate on floating-rate mortgages, which are typically pegged against a benchmark such as EURIBOR.
Among the floor's benefits to banks are that they effectively prevent the once-fanciful notion that a lender could end up owing interest to a borrower. Yet as borrowing costs have continued to fall in the wake of the global financial crisis, the floors have caused an outcry in Spain, where customers claim that they were not properly informed about the caps and that they have lost out on a share of the benefits that ultraloose monetary policy was meant to provide.
Spain's Supreme Court ruled in 2013 that banks would have to compensate customers who paid too much interest from the time of its ruling, but in December 2016, the European Court of Justice, the EU's highest court, said banks should have to repay the totality of customer losses.
Now the Spanish government has stepped in to legislate how that process should take place, publishing a "royal decree" Jan. 20 that obliges lenders to settle with borrowers within the next three months. The bank must contact affected customers and offer a settlement, and if the two sides can't reach an agreement, the borrower can start legal proceedings.
"It's positive if consumers accept the settlements," said Javier Bernat, an analyst at GVC Gaesco Beka. "(Banks) will get rid of the issue quite quickly and not spend money on lawyers and time in courts," he added in an interview.
"It gives them more visibility," said Carlos Peixoto, an analyst at BPI Online. "It will give them a time frame to work with."
However, Peixoto also said banks may not be fully in the clear just yet, because consumer rights' groups were heavily involved in the issue of mortgage floor clauses and may become involved in the settlement cases.
News of the legislation prompted a wave of filings by Spanish banks detailing the additional provisions they would take against their 2016 results. CaixaBank SA said it would increase its provisions by €110 million to a total of €625 million, while Banco Popular Español SA raised its provisions by €229 million, bringing the total for 2016 to €563 million.
Banco de Sabadell SA estimated its provisions at €490 million. Banco Bilbao Vizcaya Argentaria SA, Liberbank SA and Bankia SA kept their provisions at the same level, €404 million, €83 million and €114 million respectively.
"They are reasonable and quite manageable," Peixoto said of the provisions. "This is not something that would push a bank to raise capital."
Banks had already put aside €5 billion to deal with potential claims following the 2013 Spanish court ruling, and analysts estimated in December 2016 that lenders would have to fork out a further €2.7 billion following the EU court ruling. El País cited the head of the Spanish banking association as saying banks would have to pay out between €2 billion and €3 billion to customers, a sum that would not threaten their solvency.
Bernat said he did not expect banks to make any additional provisions, but did note that it would depend on whether the Bank of Spain decided that the amount set aside by each lender was sufficient. He added that the lender that would come under the most pressure from the additional provisions is Banco Popular, which has already flagged a potential full-year 2016 loss of €2 billion and is struggling with a large portfolio of nonperforming real estate loans.
Banco Santander SA, Spain's biggest lender by assets, will kick off the Spanish bank reporting season Jan. 25, with others to follow in the next few days. The impact of mortgage floor clauses is likely to be one of the major concerns for investors, analysts said.
"That will be a bit of a theme," Peixoto said.