Spanish banking stocks plunge as short sellers move in again

Spanish bank stocks fell sharply on Thursday after the National Securities Commission (CNMV) decided to lift the ban on short-selling of the shares of financial companies.

Investors were also unnerved by a further delay to an agreement on a second bailout for Greece, raising the specter again of a messy default. The fall in banking stocks also coincided with an announcement overnight by Moody’s Investors Service of ratings action on 114 financial institutions in Europe. This includes 21 institutions in Spain, including Santander BBVA, Bankia and CaixaBank.

Moody’s argued the action was justified by the “adverse and prolonged impact of the euro area crisis, which makes the operating environment very difficult for European banks.”

Among the Spanish banks most affected was Bankia, which shed over eight percent due to the added concern of its exposure to the ailing property sector. The bank’s parent BFA on Wednesday said the value of land on its books as a result of loan foreclosures shot up 56 percent in six months to 4.714 billion euros.

A clear price correction was needed for Spanish stocks," said Andrea Filtri, an analyst at Mediobanca in London

The sell-off in the banking sector took place as Congress approved a reform of the financial sector under which banks are being asked to increase provisions and capital for possible losses on their real estate assets. Economy Minister Luis de Guindos told deputies it would cost the banks 52 billion euros to clean up their balance sheets. The minister had previously cited a maximum figure of 50 billion euros.

De Guindos hopes that the reform will spark further consolidation in the sector, with weaker banks that are struggling to meet the new requirements merging with stronger players.

Bloomberg quoted Andrea Filtri, an analyst at Mediabanca in London, as saying the offloading of bank stocks on Thursday also reflected investor concerns about possible rights issues by lenders to meet the new provisioning requirements. “A clear price correction was needed for Spanish banking shares,” Filtri said.

The European Central Bank welcomed the overhaul of the financial sector but warned about the inadvisability of tie-ups between weak lenders. “The ECB welcomes in general these measures as they strengthen the resilience of the Spanish banking sector,” the central bank said. However, it said: “Mergers carried out only between weak lenders could limit the general benefits of the reform.”

The CNMV said the decision to lift the ban on short-selling was taken after the markets calmed down. “The situation of extreme volatility, ongoing instability and uncertainty in the European securities markets and, particularly, in financial securities, which caused the adoption of the temporary restrictions over the transactions that could constitute or increase net short positions on the Spanish financial sector have subsided over the last weeks,” the regulator said in a statement.

It also said the lifting of the ban was also aimed at removing “some adverse effects on market activity, liquidity and the depth of the market.”