RPT-Fitch: Restructured loans push Spanish bank provisions higher
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Aug 13 (Reuters) - (The following statement was released by the rating agency)
Spanish banks have reported higher non-performing loans (NPLs) and loan impairment charges (LICs) ahead of a stricter classification of restructured loans to be adopted at end-September, Fitch Ratings says. We expect that a substantial part of the provisioning efforts for restructured loans has been completed, so the tougher criteria should have less of an impact on bad debt charges and NPLs for the second half of 2013 for the majority of the six largest banks which reported recently. But asset quality and profitability remain the key risks for Spanish banks.
Underlying NPLs - excluding the inflow from restructured loans and the impact of deleveraging and acquisitions - showed some signs of stabilising in Q213 for the six largest Spanish banks. Real estate development exposures continued to be the main driver for asset quality deterioration. These banks have kept bad debt coverage at reasonable levels and are trying to reduce real estate exposure, largely through their internal asset resolution units. There has been progress with a number of asset disposals and rentals during Q213, supporting the level of provisions held against these assets. But we expect asset quality pressures to continue, also spreading further into other loan classes.
LICs will therefore remain high in H213, although probably lower than in H113 and 2012, which were affected by the reclassification exercise and to a greater extent by the front-loading of real estate provisions in response to regulatory reforms, in part linked to the international bail-out. Excluding one-offs, the level of bad debt charges for Q213 were similar to levels reported in the first quarter.
The additional impairments from the restructured loan reclassifications have largely been offset by higher capital gains from the government bond portfolio following the recovery of spreads, as well as by profits from non-core asset sales. Cost-cutting from downsizing and integration of domestic operations also helped support profitability. But there is still substantial pressure on earnings from deleveraging and asset quality risks in a weak economy.
Nevertheless, we expect net interest margins to stabilise or improve in H213 for the largest banks as they will have adjusted to the rate cut from May. Banks with a greater SME-focus may find it easier to maintain loan spreads, whereas overall funding costs should fall further as high-yielding time deposits from a period of heightened competition in 2012 roll off. We also expect further cost efficiency benefits to materialise as the restructuring efforts filter through.
These elements will be important to support returns in light of large loan impairments.
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