Spanish banks need over 50 billion euros to clean up balance sheets

The independent audit carried out by consultant Oliver Wyman estimates the Spanish banking sector needs additional capital of 53.745 billion euros to shore up balance sheets because of its exposure to the ailing real estate sector if the consolidation currently taking place among lenders is taken into account, the Bank of Spain said Friday.

The central bank says that without taking into account merger and acquisition processes that are under way and deferred taxes, the figure amounts to 59.3 billion euros, very close to the initial estimate in June by Oliver Wyman of 60 billion euros.

The government has been granted a loan of up to 100 billion euros from its European partners to bail out the sector. The administration is hopeful that some of the banks that need more capital will be able to raise funds privately, reducing the final amount required to 40 billion euros. The consultant carried out stress tests on the country’s 14 main lenders that account for 90 percent of the Spanish banking sector’s assets under different adverse scenarios.

“The results confirm that the Spanish banking sector is mostly solvent and viable, even in an extremely adverse and highly unlikely macroeconomic setting,” the Bank of Spain said in a statement.

Seven Spanish lenders, accounting for 62 percent of the analyzed portion of the Spanish banking system’s assets, will not require any further capital under an adverse scenario. These are Santander, BBVA, Caixabank, Kutxabank, Sabadell, Bankinter and Unicaja.

The results confirm that the Spanish banking sector is mostly solvent and viable" Bank of Spain

As had been flagged, the bank that needs the biggest injection of funds is nationalized Banco Financiero y de Ahorros-Bankia, which requires 24.743 billion euros under an adverse scenario. The capital needs of other nationalized entities include 10.825 billion euros for CatalunyaBanc, 7.176 billion for NCG Banco and 3.462 billion for Banco de Valencia.

The Bank of Spain said that the capital needs identified by Oliver Wyman do not represent the final figure for state aid to them. It said this will be “significantly” less once the measures included in recapitalization plans sent to the central bank are taken into account.

Banco Popular, which has been highly critical of the whole stress test arrangement, needs an additional 3.223 billion euros under an adverse scenario. Popular Chairman Ángel Ron had said: “I don´t know if this is the right medicine. It’s like taking a very aggressive medicine before falling sick.” Popular has insisted it will not require state funding to meet the requirements and plans to do so through the sale of assets.

Apart from independent experts, including real estate appraisers, the Bank of Spain and the Economy Ministry also took part in the analysis, which involved examining 38 million loans and eight million guarantees. The central bank said the quality of the data used was verified by more than 400 auditors. The process was also overseen by the European Central Bank and the International Monetary Fund.

Under the baseline scenario, which entails an accumulated decline in GDP of 1.7 percent in the period through to 2014, nine of the 14 banks examined would have met the capital adequacy ratio requirement of nine percent of risk-weighted assets. These banks account for 75.6 percent of the assets under examination. Under this scenario, the capital needs of the sector would be slightly less than 25.9 billion euros, mostly for the banks that have been nationalized and are under the tutelage of the Bank of Spain’s Orderly bank Restructuring Fund (FROB).

The adverse scenario is for an accumulated decline in GDP over the period to 2014 of 6.5 percent, with the minimum capital adequacy ratio set at six percent. The Bank of Spain said the probability of this scenario occurring is less than one percent.

The government is predicting the economy will contract by 1.5 percent this year and 0.5 percent in 2013 before returning to growth in 2014.