By Jesús Aguado
MADRID (Reuters) - Spanish banks are considering ways to boost their capital amid fears the euro zone's imminent review of their balance sheets will force them to set aside even more cash for potential losses on restructured loans, banking sources in Madrid said.
The country's banks last year made steep provisions for average losses of up to 60 percent on property lending where payment problems have already meant they are classed as bad loans. They may now face scrutiny over the coverage levels for defaults in other parts of their books, the sources said.
In particular, Spanish banks' provisions to cover refinanced loans are likely to be examined, after the Bank of Spain earlier this year told lenders to treat more of the 208 billion euros ($281 billion) of such deals as having gone bad again.
This was to address the risk that banks were rolling over or restructuring debts to struggling companies to conceal problems.
According to a Reuters analysis of 15 Spanish banks' results for the first six months of 2013, coverage levels for refinanced debts average out at 18.8 percent. Those of the six biggest banks range from 17 to 24 percent, the data show.
"It's hard to establish whether the provisions reported by banks so far this year are sufficient," said one Spanish banking source familiar with recent discussions between lenders and European authorities. "But everything points to the fact that international authorities will ask for higher coverage levels."
Most banks needing extra capital would be able to raise it through selling assets, cutting dividends or issuing bonds or even shares to investors, although some small state-controlled banks are unlikely to be able to turn to the market.
But setting aside provisions also risks sapping cash that could be used to lend to the economy, only just emerging from a deep recession that has left many small firms short of credit.
Spanish banks, crippled by a 2008 real estate market crash, are only just recovering from a deep crisis, after the weakest were rescued with 41 billion euros in European aid last year.
Banks across the euro zone face an asset quality review (AQR) early next year before the European Central Bank takes over as supervisor. The AQR will focus on potential problem areas like real estate, small business lending and shipping.
"The ECB has not yet set the parameters of its comprehensive assessment and will not comment on speculation or potential scenarios," a spokeswoman said. "Corporate loans will be subject to asset quality reviews across major euro area banks."
Several senior Spanish bank executives said privately that they believe they may fare better than rivals elsewhere, having undergone their own national health check last year. An examination of Spanish banking books, by the same consultancy now advising the ECB, Oliver Wyman, revealed a 60 billion-euro capital shortfall now filled by the banks and the state.
Cyprus's banks were also tested last year, and lenders in Slovenia, Ireland and Greece will undergo tests ahead of the European exercise.
On some levels, Spanish banks are already in better shape than others, and across their entire books, the largest lenders have average coverage levels above that of European peers.
The European Union's top 10 banks by market capitalization had average coverage ratios of 58 percent at June 2013, while the two Spanish banks among them, Santander (SAN.MC) and BBVA (BBVA.MC) had average coverage levels of 67 percent.
But in the restructured loans segment, average coverage levels are lower than the 22.4 percent Italian banks had at the end of 2012 for instance, according to Bank of Italy data. Few other countries break down data for restructured loans.
SMALLER BANKS IN THE FRAME
Spain's government has said that changes to refinanced loans would at most create an extra 2 billion-euro capital shortfall across the sector, although it is unclear whether that takes into account potential further rises in coverage levels.
Some small and mid-sized banks would be under the most pressure were this to happen. Coverage levels for refinanced debts at Liberbank (LBK.MC) and BMN, two former savings banks which took European aid last year, are already below average, at 11.8 percent and 8.2 percent respectively.
A spokesman for BMN said it planned to raise provisions to reach a coverage level of 15 percent on refinanced loans by the end of this calendar year. He did not detail what further impact that would have on the bank. Liberbank declined to comment.
Other mid-sized banks such as Banco Popular (POP.MC) and Bankinter (BKT.MC) are also lagging peers. Bankinter said its coverage levels were sufficient as its overall exposure to refinanced loans was very low. Popular declined to comment.
Analysts at BNP Paribas Exane calculated that if Spanish banks were told to raise coverage levels to 35 or 40 percent, they would need to set aside another 25 billion euros in funds.
"Banks had already complied or at least made a head start by June with most of the demands over refinancings," said a second Spanish banking source. "But the uncertain economic outlook and new and more demanding tests on bank balances in Europe will lead to more provisions and capital needs."
Popular recently issued a bond that can convert into capital, while Sabadell (SAB.MC) turned to investors for a 1.4 billion-euro capital hike. Investment bankers said other Spanish lenders would be looking to strengthen their solvency with similar moves when they can, though rights issues were being viewed by many as only a last resort.
Top banks Santander and BBVA have said they are well equipped to cope with any impact in the treatment of refinanced loans. Both lenders, with weighty overseas operations, have been selling down assets in the past two years as they strengthen their capital.
Still, some analysts predict they too could be shown up in the AQR, with those at Deutsche Bank forecasting a 1.9 billion-euro capital gap at Santander and 1.3 billion at BBVA.
Global Basel III solvency rules, which start coming in next year, are also weighing on Spanish lenders, which have around 50 billion euros of tax assets that will no longer count towards capital unless Spain enhances their guarantees.
"The government and the banks are negotiating like mad to get a more favorable treatment for tax assets," a third source at a Spanish bank said. "But in exchange Brussels is openly asking for banks to improve their capital, including through capital hikes."
($1 = 0.7398 euros)
(Additional reporting by Sarah White in Madrid and Laura Noonan in London; Writing by Sarah White; Editing by Alastair Macdonald)
- Banking & Budgeting
- Spanish banks