RPT-Fitch outlook: Spanish bank restructure benefits to crystallise
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Dec 4 (Reuters) - (The following statement was released by the rating agency)
The benefits of recent restructuring and integration in the Spanish banking system should crystallise in 2014, Fitch Ratings says. These include lower operating costs and the stabilisation of impaired loan growth at some banks, and are a driver for the revision of our sector Outlook to Stable, from Negative.
The reshaping of the sector is well underway and the bulk of banks have announced material cost reduction programmes, involving the closure of branches and staff lay-offs. For example, Bankia reported that it closed 30% of its branches and reduced its workforce by 20% in the nine months to September. These efforts will flow through to lower costs next year, even though there is still work to be done with the completion of a number of outstanding M&A transactions, disposals and further cost rationalisation.
Reforms to clean up balance sheets, such as the transfer of real-estate loans of banks that were recapitalised to the state 'bad bank', SAREB, and efforts to raise loan provisioning and classification standards, should also benefit asset quality. We expect non-performing loans (NPL) to grow in 2014, but at a slower pace as impaired loans follow economic recovery with a lag. We also believe a peak in NPL volumes at some entities is likely.
However, as a percentage of loans, the weakening of the NPL ratio is likely to be more pronounced if loan books continue to contract. This is probable because, for example, greater affordability after house price falls has been almost entirely offset by the rise in lending rates, higher transaction taxes and the end of fiscal incentives for home purchases. The economy remains weak, despite the earlier-than-expected exit from recession.
The segments that pose the greatest risk to further NPL deterioration are households and SMEs, in particular those with only limited access to export markets. Nevertheless, the scrutiny and extensive provisioning exercises of the Spanish banks means they are likely to do relatively well in the ECB's asset quality review and stress tests next year, depending on the criteria applied. We believe further capital building will be needed to offset potentially higher asset quality risks and weak earnings prospects. Higher standards under Basel III would also influence capital needs, as would the possibility of capital shortfalls arising from the ECB's assessments, which cannot be ruled out.
We see some Viability Rating upside in 2014, with a possible focus on recapitalised banks that successfully complete the restructuring as planned. Standalone financial profiles for some banks may be supported by the conversion of a portion of deferred-tax assets into government-backed transferable tax credits. However, ratings that are driven by support may come under further pressure in light of the weakening dynamics of potential future state support for senior creditors.
For more details on our expectations for Spanish banks in the coming year, see "2014 Outlook: Spanish Banks", published today at www.fitchratings.com.
Link to Fitch Ratings' Report: 2014 Outlook: Spanish Banks
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