Spain will force banks to increase provisions against real estate loans by about 30 billion euros ($38 billion) and will hire two auditors to value lenders’ assets in a fourth attempt to clean up the industry.
Banks will have to raise provisions on 123 billion euros of real estate-linked loans that are still performing to 30 percent from 7 percent on average, and the government will provide funds for those that need support, Economy Minister Luis de Guindos said today in Madrid.
The state will inject less than 15 billion euros into struggling banks, and the funds won’t add to the budget deficit, he said. The government will also force all banks to move foreclosed real estate assets into separately managed companies so they can be sold, he said.
“It’s a step in the right direction and they have made good progress on the real estate issue,” said Tobias Blattner, an economist at Daiwa Capital Markets in London. “Even so, the focus is still on real estate and to restore confidence they need to broaden it out to consumer and business loans given the shrinking economy and rising unemployment.”
The latest bid to cleanse the banking system after efforts in 2010, 2011 and February this year is part of Prime Minister Mariano Rajoy’s effort to quell doubts about hidden losses at lenders that have driven up the country’s borrowing costs.
Spain’s 10-year bond yield jumped to 6.05 percent after the measures were announced, before retreating to 6 percent.
Banking shares initially dropped, before paring losses. Banco Santander SA (SAN), the country’s largest lender, fell 1 percent to 4.87 euros, after declining as much as 5.5 percent. Banco Bilbao Vizcaya Argentaria SA (BBVA) slipped 1.3 percent to 5.24 euros, trimming a loss of 6 percent. Banco Popular Espanol SA (POP) fell as much as 6.4 percent and closed 1.5 percent lower at 2.13 euros. A Popular spokesman said the bank wouldn’t take state aid as a result of the additional provisions. CaixaBank SA (CABK) closed 1.1 percent lower after falling as much as 3.6 percent.
Today’s announcement follows the state’s May 9 takeover of Bankia (BKIA), the banking group with the most real estate, in another step to bolster confidence in a financial system burdened by 184 billion euros of assets the Bank of Spain terms “problematic.”
“These measures offer an effective response to the vulnerabilities of the banking system while appropriately providing greater transparency and differentiating the needs of the various financial institutions,” International Monetary Fund Managing Director Christine Lagarde said in a statement today.
Spain will boost provisioning on still-good land assets to 52 percent from the 7 percent level set for all types of real estate risk in February, de Guindos said. It will raise the coverage level on loans linked to unfinished buildings to 29 percent and to 14 percent for finished homes. The new rules will raise coverage for real estate assets to 45 percent, he said.
De Guindos said banks will have a month from today to say how they will meet the provisioning requirements, which come on top of the 53.8 billion euros of charges and capital ordered by the government in the previous cleanup effort in February.
A spokesman for Banco Sabadell SA (SAB) said by phone today it could make the provisions this year and stay profitable. The Spanish Banking Association said in an emailed statement its members wouldn’t seek state aid to meet the requirements.
The state will step in through its bank rescue fund, known as FROB, to buy shares or contingent convertible bonds of banks that struggle to meet the requirements, said de Guindos.
Under the program, which he said will be profitable for the government, banks that borrow will have to pay 10 percent interest and repay the aid within five years. The “Co-Co” bonds will be an “adequate” way to channel FROB funds to lenders that need them, the Spanish Association of Savings Banks said in an emailed statement.
All banks will also have to spin off foreclosed real estate into asset management companies. Spain is providing a “tool” for banks to do so and it would be “predictable and desirable” that investors put money into them, de Guindos said.
Spain may offer financial support to encourage investors to buy into the vehicles, Economy Ministry officials said today, adding that the type of mechanism to do so hasn’t been determined. While it will be obligatory to create separately managed vehicles, banks won’t be forced to deconsolidate the units, the Economy Ministry officials said.
Santander Chief Executive Officer Alfredo Saenz said on April 26 that Spain’s biggest bank didn’t need a so-called “bad bank” to park real estate.
The auditors chosen to carry out the asset valuations will be of “maximum international prestige,” said de Guindos. He declined to identify them. The valuations they carry out will be similar to a stress test and won’t be an asset-by-asset analysis, the Economy Ministry officials said.
“It’s a significant step in the right direction, particularly the approval of an independent audit, and provides a measure of reassurance that Spain is coming to grips with its banking troubles,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London specializing in sovereign-credit risk, said in an e-mail. “Yet this is not the definitive clean-up framework that the market is clamoring for.”
The government will be alert to potential conflicts of interest in choosing auditors to appraise the value of banks’ assets, de Guindos said.
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