Spanish banks see "troubled" property loans shrink

Amid the turmoil in the financial markets created by Greece's decision to submit its latest bailout to a referendum, the Bank of Spain on Wednesday estimated that local lenders' exposure to "troubled" loans to the ailing property sector as of the end of June stood at 176 billion euros.

In its half-yearly Financial Stability Report, the central bank said potentially problematic loans represented just over half of total credit to the sector, which sank into a slump at the start of 2008 after a decade-long boom turned to bust. The ratio of such loans to the banks' total credit portfolio was 11.4 percent, and to consolidated assets 5.2 percent.

The figure is down 4.8 billion euros from a year earlier. But at that rate it would take local lenders over 36 years to unwind their exposure to questionable real estate loans.

The central bank estimated that the financial sector had sufficient funding in the form of specific provisions to cover about a third of potential losses from total doubtful loans. That would be enough for them to pass the negative scenario for the sector included in the European Banking Authority's (EBA) stress tests. The central bank said under the most adverse premise for the sector, local banks would have 88 percent of potential losses covered.

According to leading appraiser Tinsa, house prices have lost a quarter of their value after peaking toward the end of 2007. As a result, banks have also had to write down the value of property they have assumed as a form of payment for loans granted to real estate companies unable to service their debt.

The EBA estimates Spain's five biggest banks need an additional 26.1 billion euros in capital to meet the new nine-percent minimum core capital ratio being imposed on European banks. That represents about a quarter of the 106 billion euros the EBA calculates is required for Europe as a whole.

The banks have said they will not need state funding or have to tap the markets to meet the new solvency requirements.

The Bank of Spain highlighted that local lenders' earnings have come under growing pressure due to higher funding costs amid the euro-zone sovereign debt crisis and higher provisions for non-performing loans.

Net attributable income of the sector in the first half of the year amounted to 7.835 billion euros, with the return of equity falling to 7.4 percent from 9.5 percent a year earlier.

Funding costs in the first half were up 33.1 percent from a year earlier, while financial revenues grew only 9.8 percent, which led to a drop of 7.9 percent in net interest income.

The central bank also predicted a further increase in the loan default ratio of the sector, which at the end of August stood at 7.15 percent, the highest level since November 1994.

"The profitability of Spanish deposit institutions remains subject to certain pressures, deriving mainly from the high weight of asset impairment losses and the narrowing of the net interest margin," the report said. "The latter is due to several factors which will tend to persist in the coming quarters, particularly sluggish activity, high financial costs and the sizeable amount of doubtful non-interest-earning assets."

With the medium- and long-term wholesale fund markets virtually closed due to the sovereign debt crisis, local lenders also face the prospect of covering some 130 billion euros in borrowed funds due next year.

"Although the maturities of wholesale funds are relatively evenly spaced over the next few years, the persistence of the financial market difficulties is a cause for concern in the Spanish banking sector," the central bank said.