By Julien Toyer
MADRID (Reuters) - Spain will give its banks a 28 billion euro ($38.6 billion)capital boost by allowing them to transform so-called deferred tax assets into tax credits backed by the state and count them as core capital under new Basel III rules, sources said on Wednesday.
The measure, seen by analysts as a key element in determining whether Spanish banks will pass or fail a Europe-wide stress test next year, has already received the backing of the European Central Bank (ECB) and will be made official in November, the official and banking sources said.
Under international Basel III rules, deferred tax assets (DTAs) would not be counted as part of a bank's core capital from January 2014, potentially reducing a measure of solvency for Spanish banks, many of which had to be rescued by European funds in the wake of the financial crisis.
Spain's biggest bank Santander (MCE:SAN) said earlier this year that having to fully cancel out DTAs would cost it up to 2.4 percent of its core capital ratio over time, while BBVA (MCE:BBVA), its main domestic competitor, said last week it could save up to 0.75 percent of capital if it was allowed to keep accounting for the assets.
BBVA said its "fully-loaded" Basel III ratio, which factors in changes to capital and deductions to be made by 2019, was 8.4 percent at the end of September, while Santander said it was on track to put that ratio above 9 percent.
The impact of the DTA changes could be even more significant at banks such as Caixabank (MCE:CABK), Sabadell (MCE:SAB), Popular (MCE:POP) and rescued lender Bankia (MCE:BKIA), which are racing to prop up their capital ahead of the tests.
"That will be a serious boost," one of the sources said on condition of anonymity, adding that the figure was unlikely to move much and could be formally agreed at a weekly cabinet meeting in early November.
Under the formula being fine-tuned, the government will allow banks to convert only certain types of DTAs into tax credits, which are guaranteed to be honoured even when a bank is liquidated. Spanish banks have about 50 billion euros of DTAs.
They will be allowed to convert into tax credits DTAs that are created when a bank makes losses or writedowns that it can offset against future tax bills when it returns to profit.
But the government would not allow the DTAs to be transformed if they were created by provisions made on pensions costs.
A spokeswoman for the Treasury Ministry, which will have the final say, insisted no final decision had yet been made and said officials were actively working on the issue.
The economy ministry and the Bank of Spain declined to comment.
The decision could also smooth the sale of nationalised bank NCG Banco, as it would make the lender more attractive to potential bidders if it comes with tax credits.
Spanish banks have long argued that not allowing them to swap the assets for tax credits would put them at a disadvantage versus their European peers in next year's stress test. Italian banks were given such an accounting relief from their central bank in 2011.
"Given this precedent, (ECB chief Mario) Draghi is on board," an official source said. ($1 = 0.7262 euros)
(Editing by Sarah White and David Holmes)