Spain's banks are benefiting from an economic recovery, butthe glare of imminent EU-wide stress test results could expose capital andasset quality problems.
Figures from S&P Global Market Intelligence show that,among the largest Spanish lenders, capital has generally strengthened in recentyears, and nonperforming loans declined significantly. The Spanish bankingsystem reached a common equity Tier 1 ratio of 12.5% in 2015, up from 11.6% in2014. Problem loans as a percentage of gross customer loans declined to 7.6% in2015, down from a peak of 12.9% in 2013, and there is a clear trend of totalNPLs falling at most large banks since 2013.
The general economic situation is good and appearssustainable for 2017, according to Bankia Bolsa bank analyst Javier Bernat,with GDP growing above 2%, implying employment growth. "The outlook ismuch better than the last two or three years; property prices are rising by 2%and 3% year over year," he said in an interview. Commerzbank is predictingGDP growth of 2.9% in 2016 and 2.5% in 2017.
But profitability and returns are under pressure from mutedloan demand, low interest rates and increasing competition. and posted net interest margins of 2.48% and 2.39%, respectively,for the first quarter, but the purely domestic Spanish banks are achieving lessimpressive figures of between 1% and 2%. CaixaBank SA, Bankia SA and Banco Popular Español SA reported figures of 1.36%,1.21% and 1.58%. Bernat said he expected this to persist, and the net interestmargin in Spain to decline, resulting in returns of between 7% and 9% for theinternational banks and about 5% for the domestic banks.
Further, the resilience of asset quality and capital in adownturn will be challenged by the European Banking Authority's stress test,the results of which are due to be released July 29. The picture for foreclosedreal estate is murky; the total has ticked up at Santander, BBVA, CaixaBank andPopular since 2013. And Texas ratios remain high — at several major lendersincluding Banco de SabadellSA, which, along with those banks mentioned above, will also bestress-tested, NPLs still represented more than 100% of common equity plusreserves in 2015.
The stress test's adverse macroeconomic scenario implies adeviation of EU GDP from its baseline level by 3.1% in 2016, 6.3% in 2017 and7.1% in 2018, as well as "a shock in residential and commercial realestate prices."
Asset quality already forced a €2.5 billion at Popular in May.It was the third in less than four years and represented around half of itsmarket capitalization, as Citi analysts observed in a May 26 note. At the endof 2015, Popular had €19.6 billion in nonperforming loans and €10.1 billion inforeclosed real estate, equating to some €29.7 billion in nonperforming assetsand resulting in a 169% Texas ratio. The new equity is intended to cut NPAs tobelow €20 billion in 2018.
Sabadell, with a Texas ratio of 115%, could fall foul of thestress test, given that it had €6.6 billion in loan reserves, equating to 33%of NPAs at the end of 2015. Among the smaller Spanish banks that are notparticipating in the stress test, Liberbank SA, with a Texas ratio of 166%, looks notablyweak although it recently emphasized its high collateralization and coverageratios. Banco Mare NostrumSA, Grupo CooperativoCajamar and IbercajaBanco SA also could be challenged should growth falter. All ofthese banks have improved their Texas ratios since 2013, but the question iswhether the European authorities regards this as sufficient.
A bank equity analyst, who preferred not to be named,cautioned that, although the trends are improving, the issue of so-calledrestructured loans is "definitely a key issue." Suchloans are identified in most EU jurisdictions as "exposures modified dueto difficulties of the debtor."
"It could be seen as an area of risk in Spain if theeconomic outlook deteriorated and unemployment trends do not continue toimprove," the analyst said in an interview. He observed, though, that themigration of restructured loans appeared not to be happening at present, andthat much of the real estate and developer loans are already included in thebanks' NPL book.
Property sales, which are critical to improving bank balancesheets and Texas ratios, are proving a challenge, Bernat said.
"There are quite a lot of banks selling assets,"he said. "Who is going to take them? Last year Bankia, Sabadell andPopular had to scale back the size of their deals. A great deal of the realestate is being sold to foreign investors. [Spanish politics] make this avolatile situation."
A stable government in Madrid has yet to emerge from therecent election.
Spanish banks received a potentially very important boost onJuly 13 when a nonbinding opinion from the European Court of Justice indicatedthat they will not have to repay homebuyers excess mortgage interest chargedbefore May 2013. The banks imposed floors on mortgage interest rates,preventing them following central bank rates downwards. On the whole, bankshave set aside money for excess interest paid since May 2013 but not before.
According to SocGen analysts, writing in a May 12 note, thebanks (excluding Santander) have provisioned 1% of tangible equity but couldend up paying up to 6% of tangible equity. A definitive judgment is still expected,but the opinion of Advocate General Paolo Mengozzi of the Court of Justice hasencouraged markets to think the banks' exposure could be limited to currentprovisions.
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