Spanish banks will need to put aside extra provisions of up to 10 billion euros to cover loans that borrowers will struggle to repay, according to an internal estimate by the Bank of Spain.
According to recent data, Spanish banks rolled over more than 200 billion euros of loans before they expired – often because corporate borrowers would be unable to repay their debt on time and in full. The 10 billion euro estimate is the first official assessment of the likely impact of the central bank's new approach towards these refinanced loans.
The Bank of Spain believes that the risks emanating from this practice, known as "extend and pretend", have not been fully covered and is pressing all banks to reclassify their refinanced loans according to tighter standards by the end of September. The new regime will make it harder for banks to treat refinanced loans as if they were performing normally, in turn forcing lenders to take additional provisions.
"Our banks will need more provisions," a senior official at the Bank of Spain told the Financial Times. "The provisions will affect their results, but the question is by how much. We cannot know for sure but we think the impact will be between 5 billion and 10 billion euros [in provisions] across the system."
The new round of provisions is expected to make a significant dent in profits at a time when Spanish bank earnings are already under severe pressure in their home market. Spain is mired in a two-year recession, with both companies and households suffering the aftermath of a debt-fueled housing bubble and soaring unemployment.
More from the FT
Analysts and Spanish officials believe the central bank's tough new approach towards refinanced loans is likely to force weaker lenders – which are focused exclusively on the domestic market – to raise more capital through asset sales, capital increases or by tapping Spain's bank rescue fund for more money
However, the senior Bank of Spain official said the central bank's view was that "the banks can handle it".
Not all provisions would have to be taken in one go this year, the official added. Instead, banks would have to take the financial hit depending on the how soon their refinanced loans mature.
Officials familiar with the matter stress that the financial hit will be much harder on smaller banks than on large diversified financial groups such as Banco Santander and BBVA, which generate sufficient earnings to easily absorb the expected new spike in provisions.
There is particular concern about the loan book of lenders that were nationalized last year. Bankia, the lender that became the symbol of Spain's banking crisis, accounts for the bulk of assets of banks currently in the hands of the state.