Spain fund won't avoid bank consolidation-analysts

By Judy MacInnes

MADRID, Oct 8 (Reuters) - Spain's 30 billion euro ($40.9 billion) aid package will ease banks' cash problems but will not end the liquidity drought or save them from consolidation, senior financial sources and analysts said on Wednesday.

Mid-sized banks and the country's 46 savings banks, which are highly exposed to the sharp downturn in the domestic property sector, are seen as particularly vulnerable, they said, despite the package of measures announced on Tuesday. [ID:nL7363787]

An estimated 70 percent of the savings banks' combined 900 billion euros loans portfolio is in real estate.

Some of these assets might be bought by the state, after Prime Minister Jose Luis Rodriguez Zapatero said the government would set up a 30 billion euro fund to buy up good quality assets from the banks.

But analysts said the industry's problems might not be solved by the fund, which can be extended to 50 billion euros, and whose creation was accompanied by a guarantee on deposits up to 100,000 euros.

"The main problem for the Spanish banks is not solvency but liquidity," a top banking source who requested anonymity said.

"The starting point from which the Spanish banks are facing this crisis is excellent, but the question is how long they can last if the access to the wholesale funding markets remains closed," the source said.

Another leading financial sector source who also requested anonymity said Spain's main problem is that it has never shared the savings culture of other European countries.

So as domestic savings were insufficient to fund the spectacular economic growth over the last 10 years, banks relied heavily on international funding, which has now dried up.

Deutsche Bank said the government liquidity injection could be a good complement to funding facilities provided by the European Central Bank (ECB).

"Faced with the increasing competition seen in the latest liquidity auction, the virtual disappearance of the interbank market and the expected tightening of ECB's repo rules, this should at least put Spanish banks in a more comfortable position for the rest of 2008," it said in a note.

LIQUID ASSETS

Still, ECB council member and Bank of Spain Governor Miguel Angel Fernandez Ordonez saidon Tuesday mergers were likely.

Spain's top two banks Santander (SAN.MC) and BBVA (BBVA.MC) and top savings bank La Caixa are seen as winners in any restructuring, due to their capital base and liquidity position.

The government said it wanted banks to use the money to keep credit flowing to the slowing economy.

But Jagoba Garcia at brokerage Fox-Pitt Kelton said banks might refinance debt instead. "The fact is that banks don't want to lend. They want a much more liquid balance sheet," he said.

According to Bank of Spain data, only about 34 percent of total outstanding financial sector debt, or 262.7 billion euros, is due to be refinanced before 2013.

The lion's share of total debt, or some 502 billion euros, is due from 2013 onwards.

The big question is how long mid-size banks and savings banks can survive independently with funding desperately tight. The level of non-performing loans is also jumping, with Banco Popular (POP.MC) reporting they doubled in the year to end-June.

Credit Suisse analysts noted bad loans in Spain doubled in 2007 from a year earlier and they expect a further doubling to 5 percent this year.

The banking source said: "Bad loans are increasing ... but the main point is that the impact of the economic crisis in Spain has not yet filtered through to banks' balance sheets."

He said NPLs could reach 7 or 8 percent within the next two years.

While most banks could raise capital to ease the erosion of their capital base, unlisted savings banks would have no option other than to merge or be swallowed up, analysts said.

"We are going to see mergers among the savings banks and the smaller banks, brokered by the Bank of Spain," the top banking source said. "But they will not be mergers of equals. The consolidation will be forced".

Another financial source said: "It's obvious that the Spanish financial system is heading for restructuring. And the bigger institutions will be the buyers. But in part it will be a forced situation, with the Bank of Spain involved....That is clear from the latest messages we are hearing." (Editing by David Holmes)