Login to UKBP
Commercial Property News
€99 billion bank rescue scheme launched by Bank of Spain as non-performing loans soar
On friday the Spanish government announced details of a rescue fund of up to €99 billion (£85 billion), though starting with just €9 billion, Fund for Ordered Bank Restructuring (FROB) to ward off possible systemic risk and help restructure its bloated banking system. But implementing the plan, which has been a long time coming, will be tricky.
The fund will draw €2.5billion of it's initial capital from the privately run Deposit Guarantee Fund, with the balance from the government. The FROB can eventually borrow up to 10 times its initial capital level, or a total of 90 billion euros. In 2009 it can borrow three times its capital, or 27 billion euros. The fund will be controlled by the Bank of Spain and its board chaired by the central bank's deputy governor. Banks which borrow will have 5 years to repay loans.
Spain has 49 clearing banks, 46 savings banks and 90 credit cooperatives, and Spain's banks hold total assets worth €2.064 trillion whilst the savings banks hold €1.307 trillion in assets.
So far Spain’s banks have held up well, thanks to cautious regulation and a focus on traditional banking. Only one small savings bank, Caja Castilla La Mancha, has run into serious trouble. But they now face a tough couple of years. Unemployment is at 18% and rising. Profits are falling, and non-performing loans (NPLs) have nearly quadrupled in the last 12 months. In April NPL's were 3.81% for banks and 5.05% for savings banks. The full impact of these bad loans has yet to affect earnings, for two reasons. One is that banks have been busy restructuring loans, and in many cases swapping debt for properties from overstretched developers. This flatters the NPL ratio, but may store up problems for the future. The Savings Bank Association (CECA) expects NPLs to reach a maximum of 9% next year.
Second, banks have two years to make full provision against highly leveraged mortgages or problem loans to property developers. These bad loans will hit profits some time in the next 12-24 months, says Matteo Ramenghi, an analyst at UBS. Most banks have already exhausted their thick cushion of so-called “generic provisions”, reserves set aside during the boom times. For some banks, bad debts will wipe out all their profits.
Spain’s unlisted savings banks, or cajas, which together make up half of the country’s financial system, look especially vulnerable. Controlled by local politicians, they have grown rapidly, lending generously to property developers and funding politically motivated projects. Bankers reckon there are at least six big cajas that will soon be short of capital. But recapitalising them will not be easy, mainly because they do not issue ordinary shares. As part of the bail-out plan the government can subscribe to “participatory shares” with voting rights. In return, the cajas will have to restructure, and in some cases be taken over by stronger institutions.
Spain’s banking sector does not just need fresh capital; it also needs to shrink. The industry grew too much during the boom. The tiny high street in Aravaca, a suburb of Madrid, sports no fewer than nine banks and savings banks. PricewaterhouseCoopers, a consultancy, estimates that there are 30% more branches than are needed.
So far only the big banks like BBVA have been closing branches. But a large number of cajas may have been keeping their closure programmes on hold while waiting for the bail-out plan, says Iñigo Vega of Ibersecurities, a stockbroker. Merger plans have also been on standby. Bankers predict that the number of cajas will fall by half from the current 45. Combinations of cajas from different regions, with little branch overlap, make the most sense.
Click here!
Politicians have been bickering over whether regional governments ought to have a veto over such mergers. There is a stronger argument for keeping such powers in the hands of the Bank of Spain. The central bank has won admiration around the world for keeping its charges from getting sucked into the international financial crisis, even if the bank—and the central government—did not do enough to prevent uncontrolled growth in property lending.
Spain’s commercial banks will probably wait until the dust has settled on the restructuring of the savings banks before they contemplate mergers and takeovers. The big two banks—Santander and BBVA—are somewhat protected by diversification abroad. But all banks will have to close branches, cut costs and focus on recovering bad loans.
The fund will draw €2.5billion of it's initial capital from the privately run Deposit Guarantee Fund, with the balance from the government. The FROB can eventually borrow up to 10 times its initial capital level, or a total of 90 billion euros. In 2009 it can borrow three times its capital, or 27 billion euros. The fund will be controlled by the Bank of Spain and its board chaired by the central bank's deputy governor. Banks which borrow will have 5 years to repay loans.
Spain has 49 clearing banks, 46 savings banks and 90 credit cooperatives, and Spain's banks hold total assets worth €2.064 trillion whilst the savings banks hold €1.307 trillion in assets.
So far Spain’s banks have held up well, thanks to cautious regulation and a focus on traditional banking. Only one small savings bank, Caja Castilla La Mancha, has run into serious trouble. But they now face a tough couple of years. Unemployment is at 18% and rising. Profits are falling, and non-performing loans (NPLs) have nearly quadrupled in the last 12 months. In April NPL's were 3.81% for banks and 5.05% for savings banks. The full impact of these bad loans has yet to affect earnings, for two reasons. One is that banks have been busy restructuring loans, and in many cases swapping debt for properties from overstretched developers. This flatters the NPL ratio, but may store up problems for the future. The Savings Bank Association (CECA) expects NPLs to reach a maximum of 9% next year.
Second, banks have two years to make full provision against highly leveraged mortgages or problem loans to property developers. These bad loans will hit profits some time in the next 12-24 months, says Matteo Ramenghi, an analyst at UBS. Most banks have already exhausted their thick cushion of so-called “generic provisions”, reserves set aside during the boom times. For some banks, bad debts will wipe out all their profits.
Spain’s unlisted savings banks, or cajas, which together make up half of the country’s financial system, look especially vulnerable. Controlled by local politicians, they have grown rapidly, lending generously to property developers and funding politically motivated projects. Bankers reckon there are at least six big cajas that will soon be short of capital. But recapitalising them will not be easy, mainly because they do not issue ordinary shares. As part of the bail-out plan the government can subscribe to “participatory shares” with voting rights. In return, the cajas will have to restructure, and in some cases be taken over by stronger institutions.
Spain’s banking sector does not just need fresh capital; it also needs to shrink. The industry grew too much during the boom. The tiny high street in Aravaca, a suburb of Madrid, sports no fewer than nine banks and savings banks. PricewaterhouseCoopers, a consultancy, estimates that there are 30% more branches than are needed.
So far only the big banks like BBVA have been closing branches. But a large number of cajas may have been keeping their closure programmes on hold while waiting for the bail-out plan, says Iñigo Vega of Ibersecurities, a stockbroker. Merger plans have also been on standby. Bankers predict that the number of cajas will fall by half from the current 45. Combinations of cajas from different regions, with little branch overlap, make the most sense.
Click here!
Politicians have been bickering over whether regional governments ought to have a veto over such mergers. There is a stronger argument for keeping such powers in the hands of the Bank of Spain. The central bank has won admiration around the world for keeping its charges from getting sucked into the international financial crisis, even if the bank—and the central government—did not do enough to prevent uncontrolled growth in property lending.
Spain’s commercial banks will probably wait until the dust has settled on the restructuring of the savings banks before they contemplate mergers and takeovers. The big two banks—Santander and BBVA—are somewhat protected by diversification abroad. But all banks will have to close branches, cut costs and focus on recovering bad loans.
Mon, 29th Jun 2009