Bankers Whisper: Spain's Bailout Bill Could Rise
Spain's bill to bail out its banksmay yet rise, some bankers and analysts fear, as a worseningeconomy hampers the government's early attempts to sell offnationalized lenders and threatens the "bad bank" housing theirrotten property deals.
Spanish banks say the worst is behind them after steeplosses last year and they are now recovering - a view broadlyshared by authorities such as the European Commission, backer ofa 41 billion euro ($54 billion) rescue of ailing lenders.
But while Madrid is on schedule with demanded industryreforms and banks are better protected against losses from asunken real estate market, a growing number of bankers argue inprivate that more state funds may still be needed to help sellrescued lenders and keep "bad bank" Sareb ticking over.
Sareb was used to clean the balance sheets of state-rescuedbanks by taking on 50.7 billion euros worth of foreclosedproperties and troubled loans to real estate developers.
The assets are matched by 50.7 billion euros in senior debtand backed by 4.8 billion euros in capital, more than half ofwhich was contributed by Spain's healthy lenders to reduce theburden on state books.
The 8 percent capital cushion may however be too thin towithstand losses without a top-up, which could be hard to sourcefrom the private sector, said several senior Spanish bankers andinvestment bankers who have worked with the government.
"It was a big mistake. The government is going to have totake over the entire vehicle sooner or later," said a Spanishbanking executive, on condition of anonymity, echoing a viewfrom three other senior bankers.
Spain took 41 billion euros of a 100-billion-euro Europeancredit line to bail out its banks last year. The bill added theequivalent of 3.5 percent of gross domestic product to a deficitthat was already higher than allowed under EU rules.
The bailout came after several failed government efforts toclean up the financial sector, crippled by more than 300 billioneuros in bad loans after a housing bubble burst in 2008.
If the liabilities of the bad bank, known by itsSpanish-language acronym Sareb, were to be put on the state'sbalance sheet, it could add up to another 5 percentage points ofGDP to the country's debt, pushing it to more than 100 percentof annual output. Spain's economy ministry declined to comment.
Worries at the Bad Bank
The real estate parked with Sareb was already written downby an average of 63.1 percent and the loans by 45.6 when theassets were transferred to the bad bank, but four bankers arguedthat further losses could still deplete its capital.
Of its loans, only 22 percent are considered "normal"; 34percent are rated "substandard" and 45 percent "doubtful".
Most of the loans are linked to finished properties, forwhich it might be easier to find a buyer, but 4.3 percent arefor unfinished developments and nearly 10 percent are for emptylots, for which there is little or no demand.
Nearly all of the foreclosed properties in its portfolio areempty, including apartment blocks far outside big cities. Only6,000 of nearly 83,000 housing units have tenants.
Bankruptcies and defaults are on the rise in Spain, and thefall in housing prices accelerated in the first quarter. Thebankruptcy of property developer Reyal Urbis , whichnow counts Sareb as one of its major creditors, underlined theproblem.
Meanwhile, Sareb is just beginning to comb through itsassets.
"This (structure) could be a problem if the vehicle startsmaking losses and needs more equity, something very likely tohappen in our view once it reappraises its assets," JPMorgananalyst Jaime Becerril said in a recent note.
One source familiar with Sareb said it was aware of the riskit might need more capital, but believed "that would only happenunder an extremely distressed economic scenario."
A stress test of Spanish banks last year by consultantOliver Wyman, which served as the basis for some of Sareb'scalculations, defined a worst case scenario as a 2.1 percenteconomic drop in 2013 and a 0.3 percent contraction in 2014.
Spain expects its economy to shrink 1.3 percent in 2013,further than initially forecast, while growing 0.5 percent in2014.
Sareb does have a contingency plan for shoring up capital,which involves restricting eventual dividend payments toshareholders, the source said. Otherwise fresh capital will haveto come from investors - the state, or sound banks, some of whomhad came under pressure from the government to invest.
A spokeswoman for Sareb said "the contingency plan is thesales plan", which entails selling almost half of assets overthe next five years and paying down half of the debt.
That would bolster Sareb's capital position, she said,adding that the vehicle had enough capital at present to see itsstrategy through and relative to the assets it has.
Capital Conundrum
Spain has already had to fork out more funds to help sellrescued banks.
After failing to sell nationalised lender CatalunyaBanc inFebruary as bidders demanded greater guarantees against futurelosses, the government was forced last month to pump 245 millioneuros of extra capital into small nationalised Banco Gallego toclinch its sale to Sabadell for one euro.
While a small amount relative to the billions already pouredinto the system, the need for a capital hike exposed worriesabout the risks still attached to bailed-out lenders.
Spain still fully owns three banks, including Bankia, controls another, Banco Mare Nostrum, and could yetend up controlling a fifth, Banco CEISS, if its sale to Unicajafalls through.
These banks and healthy ones alike are increasinglyvulnerable to rising bad loans, especially among small companyborrowers, as the Spanish economy worsens. For now, that ismainly seen as a threat to earnings.
While most banks maintain they have stocked up on enoughcapital to counter growing provisions for losses, a handful ofanalysts still believe some will have to do more to ward offproblems outside the real estate realm.
The Bank of Spain on Tuesday tightened the rules on howbanks classify bad debt in cases of refinancing, in a move thatcould force lenders to recognise more bad debt.
Ratings agency Moody's had forecast last October that bankshad a 100 billion euro capital gap, rather than the 54 billioneuros projected by Oliver Wyman in its stress test.
"Despite all the developments, it's difficult to see thatall of that 100 billion euros is cancelled out," AlbertoPostigo, analyst at Moody's, said.