Bloomberg News

Spain Banks Shun State Aid to Bolster Capital by $24 Billion

October 27, 2011

(Updates with comment from investor in fifth paragraph, from Bank of Spain and banking association from seventh.)

Oct. 27 (Bloomberg) -- Spanish banks won’t tap state funds to bolster capital by 17 billion euros ($24 billion), with Banco Bilbao Vizcaya Argentaria SA and Banco Santander SA relying on profits and changes to the way risk-weighted assets are calculated.

While Spanish banks have to bolster capital by 26 billion euros, they can put 9 billion euros of convertible bonds they’ve already sold toward that amount, the European Banking Authority said today. The extra funds are needed to meet a requirement for banks to hold 9 percent in core capital after sovereign debt writedowns, including a 3 percent cut to Spanish bonds.

BBVA, which has to bolster capital by 7.09 billion euros, said it will use retained earnings to do so and is talking to the Bank of Spain about changes to risk-weighted assets that are used to calculate core capital. Santander will also generate capital from profits and will continue work on “optimizing risk-weighted assets,” it said in a statement. Both banks aim to keep their dividend policies.

Spanish banks are facing the second overhaul of capital rules this year as they battle doubts over the impact of the sovereign debt crisis on their balance sheets. Greek, Spanish and Italian banks were the most affected by the decisions taken at the European summit early today, where leaders also increased the firepower of the euro region’s bailout fund and persuaded banks to take 50 percent losses on Greek debt.

‘Very Appreciative’

“I’m very appreciative of the fact that they won’t have to do a capital increase and it looks like they’ll be able to take additional measures to make sure they have enough,” said Peter Braendle, who helps manage about $60 billion, including Santander and BBVA shares, at Swisscanto Asset Management in Zurich.

Santander shares rose 4.4 percent at 11 a.m. in Madrid and BBVA stock climbed 5.9 percent, outperforming Spain’s main Ibex- 35 index, which increased 3.2 percent.

The Spanish Banking Association criticized the new requirements as “arbitrarily high,” and said they reduce the credibility of previous stress tests. The haircut applied to the debt of “solvent” euro members “undermines confidence” in them, it said in a statement today. The impact of sovereign debt writedowns was 2.6 billion euros for Santander and 1.91 billion euros for BBVA, the lenders said.

The extra yield on Spanish 10-year bonds compared with German equivalents narrowed to 317 basis points today from 344 basis points yesterday, the lowest in two weeks.

Risk Weightings

Banks will be able to reach the new requirement “reasonably,” the Bank of Spain said in a statement, noting that lenders had said they won’t tap public funds.

BBVA, Spain’s second-biggest bank, said the capital shortfall is 6.3 billion euros using September data. It would generate 2.6 billion euros of capital organically by the second quarter of next year. Moves to “optimize” risk-weighted assets could have an impact of 2.1 billion euros in additional capital, Chief Financial Officer Manuel Gonzalez Cid told analysts on a webcast today.

“I would be shocked if they did anything different,” Braendle said. “They have to comply with the rules but I would perfectly understand if they took steps to optimize their structure. Anyone would do the same.”

Santander Shortfall

Santander said the EBA’s calculations gave it a core capital ratio of 7.9 percent in June, rising to 8.12 percent in September, including around 8.5 billion euros of convertible bonds. That means that as of June 2011, Santander would have to bolster capital by 6.47 billion euros, a figure that falls to 5.22 billion euros when making the calculation using data from September 2011.

Banco Popular Espanol SA said its 2.36 billion-euro capital shortfall would be plugged with convertible bonds that it already issued, as well as the extension of a scrip dividend program and “improvements via the reduction of risk-weighted assets.” The move won’t affect its plans to take over Banco Pastor SA, it said in a regulatory filing.

Grupo BFA, which controls Bankia, also ruled out using public funds to plug the capital shortfall of 1.14 billion euros the EBA identified. La Caixa group, which controls CaixaBank, will also fund its 602 million euro deficit “easily” through capital it generates organically.

--Editor: Frank Connelly, Stephen Taylor

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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