Funding gap to prompt Spanish bank mergers
SPAIN’S banks are expected to kick off a new round of mergers following the government’s demand that they put aside billions more to provide for losses on property lending.
As banks shares across Europe tumbled three to nine per cent (see below), the Bank of Spain revealed that Spanish lenders’ use of its emergency borrowing facility jumped by 16 per cent last month to €317bn (£253bn).
The banks’ heavy dependence on public finding makes the need to cut down their balance sheets more urgent, meaning they will have to take heavy losses on billions of property assets that they have been holding in the hope that values will rise.
The government’s move on Friday is meant to force banks to tackle a huge overhang of dodgy loans made during the housing bubble. BBVA said the new rules will force it to put €1.8bn aside for losses, compared to Santander’s extra provision of €2.7bn.
But ratings agency Fitch said that large banks like Santander and BBVA are not as badly hit as small and mid-sized lenders because the new provisions are only 20-43 per cent of their profits versus “nearly three times their operating profit” for smaller banks.
Therefore, Fitch says: “The government has incentivised banks to merge.” Lenders have just under a month to present plans for how they will find the money, which could prompt a frantic round of deal talks.
The preparations will be doubly difficult because not only will they need to cover a higher proportion of the losses with capital that is on standby, but their estimate of the losses will have to become more realistic. Rather than expecting a 25 per cent write-down, they might have to factor in a loss of more than 60 per cent on many of property assets, according to Fitch.
Estimates for the size of the total capital hole in Spanish banks’ balance sheets range from the government’s €30bn to UBS’s €150bn.
Bank shares tumbled across Europe yesterday
Bankia -8.7%
Santander -3%
BBVA -3.7%
Deutsche Bank -4.1%
Commerzbank -2.7%
Credit Agricole -5.5%
Société Générale 4.2%
Lloyds -5.5%
RBS -4.8%