By The Financial Times
Luis de Guindos, Spanish economy minister, has launched another round of Spanish bank restructuring after more than three years of a financial crisis centred on more than €175bn of bad loans linked to construction and housing.
The detailed plan announced by the centre-right government last week, five weeks after it replaced the Socialists in power, obliges banks to find about €50bn from profits and capital this year to boost bad loan provisions and clean up their balance sheets.
Only the strongest banks – led by Santander, BBVA and Caixabank – can milk their recurring profits to achieve the new requirements quickly, and Mr de Guindos intends to force further restructuring among weaker lenders by allowing banks that have agreed to merge by May an extra year to find the money.
If they cannot, they will have to apply to the Fund for Orderly Bank Restructuring (Frob) for high-interest loans in the form of contingent convertibles or Cocos and risk being nationalised.
Spanish bankers and bank analysts say the measures will trigger more bank mergers – although the number of cajas or savings banks groups has already been cut from 45 to 13 – and also accelerate deals already under consideration.
Francisco González, executive chairman of BBVA, said last week he expected “six or seven” significant banks would remain after the current restructuring was completed.
Much attention is focused on Bankia, the merged group of Caja Madrid and six other cajas that is heavily burdened with non-performing property assets and needs to find €6-7bn to meet the new rules.
Although the group says publicly it can comply by converting preference shares into equity, selling non-strategic assets and other measures, bankers say it is examining the possibility of buying a smaller bank – possibly Unnim or NovaCaixaGalicia, which were nationalised last year – to give itself the extra year.
Previously, banks that had received direct official aid from the Frob, as Bankia has, were not permitted to launch bids in this way. “Before we had only one choice, to fulfil [provisioning and capital requirements] or not,” said one banker familiar with Bankia’s strategy. “Now we have another option.”
An earlier possibility was that one of the big three – Santander, BBVA or Caixabank – would be persuaded by the government to take over Bankia, but neither side is enthusiastic about the idea.
Santander, for example, has remained profitable through the crisis mainly because it has diversified into Latin America, and it is reluctant to increase its exposure to the struggling Spanish economy.
The main criticism of Bankia’s likely strategy of buying a smaller bank is that it undermines Mr de Guindos’s attempt to organise a rapid clean-up of the banking system. “The key question is whether this leads to consolidation that makes sense, or to marriages of convenience,” says Iñigo Vega, bank analyst at CA Cheuvreux.
Bankia, however, is not the only lender talking about deals. Sabadell is planning to launch a €1-1.2bn rights issue to help finance its takeover of Cam, the Valencia-based savings bank from most of whose losses Sabadell is shielded by an official asset protection scheme.
Other possible combinations under discussion include a BBVA takeover of CatalunyaCaixa and the sale of Banco de Valencia by the state to Banco Mare Nostrum.
A worry for the government and the banks is that the underlying domestic economy continues to worsen, with Spanish gross domestic product expected to shrink by 1.5 per cent this year.
Under the de Guindos plan, banks will have to set aside €40bn of extra provisions and capital on the €175bn of bad property assets – including repossessed land and homes – already identified by the Bank of Spain. Provisioning on land holdings, for instance, will rise from 31 per cent to 80 per cent by the end of the year.
But he earmarked a further €10-11bn in provisioning, to the tune of 7 per cent, for the €160bn of property developer loans that are performing but may not continue to do so.
The Bank of Spain numbers used by Mr de Guindos are already out of date, since they represent a snapshot of the situation on June 30 last year.
According to Mr Vega, in the last quarter of 2011 Santander and BBVA alone (which are among the better banks and represent just 15 per cent of the exposure between them) added €2bn in non-performing property loans.
Elcano Sicav, a fund manager, estimated additional provisioning needs at €100bn, double the headline number provided by Mr de Guindos.
Spanish bank reform, in short, is still a work in progress. “This is a good initiative to accelerate the restructuring process of the financial sector,” say analysts at Espirito Santo investment bank, “although we expect a significant number of banks to ask for public support via Cocos.”