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Spanish banks face hefty provisions following EU ruling on mortgage floors

A ruling by the European Court of Justice over mortgage floor payments will require Spanish banks to repay billions of euros to customers and lead to hefty additional provisions.

Mortgage floor clauses cap the interest rate on floating-rate mortgages, meaning some borrowers were unable to benefit from the fall in interest rates. Spain's Supreme Court ruled in 2013 that such clauses were unfair and that banks would have to compensate customers who paid too much interest from the time of its ruling. But the EU court ruling goes one step further and means banks will now have to repay customers beyond what they lost since 2013.

The decision, announced Dec. 21, was not widely expected because the Advocate General had sided with the original court decision, according to Jefferies analyst Benjie Creelan-Sandford.

"The fact that the European Court of Justice has gone the other way is definitely a surprise," he told S&P Global Market Intelligence.

Spanish bank shares fell, with Banco Popular Español SA down 5.5% at market close, Liberbank SA tumbling more than 13%, and Banco de Sabadell SA and Banco Bilbao Vizcaya Argentaria SA also down.

Manageable, but unhelpful

Creelan-Sandford estimates that Spanish banks will have to put aside further provisions of about €2.7 billion to pay for claims over the mortgage clauses.

"Arguably it is a manageable impact, but it is obviously an unhelpful bill," he said.

In April, a court in Madrid ordered approximately 40 banks, including CaixaBank SA, Banco Popular, BBVA and Sabadell, to refund the extra interest paid on mortgages since the 2013 ruling. Banks have put aside €5 billion to deal with potential claims, according to Reuters.

Before today's ruling Banco Popular Español had said it would book provisions of €334 million related to this issue. The bank is undergoing a restructuring plan and is already facing a loss of €2 billion this year.

"This is another bill that they will have to pay," said Creelan-Sandford.

Spain's second largest lender, BBVA, said Dec. 21 that the issue would hit earnings by €404 million this year, while medium-sized Liberbank put the cost at €83 million.

The latter would be most impacted because of the amount of provisions relative to its size, said Carlos Peixoto, an analyst at BPI Online. He estimated its exposure at about 7% of the bank's market capitalization.

BBVA would be able to absorb charges more easily because of it is so large, Peixoto said, adding that the €1.2 billion it said the provisions may extend to was equal to 2% of the bank's market capitalization.

Peixoto estimated that Spanish banks' capital ratios could be hit by between 10 and 44 basis points because of provisions.

"It's obviously negative but it is manageably negative," he said. "It's not something that will push any of the banks into a rights issue."

The next challenge in the process will be exactly how banks will pay back customers, something which could be a long, complicated process. There is little information about how borrowers would be refunded, and what steps they will have to take in order to get their money back.

"All of this could help to lower the impact," Peixoto said.