UPDATE 1-Spain banks strong, bad loan cover could slide-c.banker

(Adding comments, further details)

By Paul Day

MADRID, Sep 18 (Reuters) - Spanish banks' coverage for fast-rising bad loans could fall as low as 50 percent but institutions are strongly placed to cope, a senior Bank of Spain official said on Thursday.

A sharp rise in bad debts as of July was largely due to the default of property company Martinsa-Fadesa (MFAD.MC), and was expected and no cause for concern, the high-ranking official from the Bank of Spain, who asked not to be named, said.

"This should be no cause for alarm as we have high provisions to cover us in bad times and this rise in bad debts was expected," the official said.

Banks' non-performing loans ratio leapt to 2.14 percent in July from 1.6 percent in June, Bank of Spain data showed.

Spanish banks had average coverage against bad loans of over 200 percent at the end of 2007, though this has fallen this year to around 107 percent for savings banks and 149 percent for commercial banks.

Bad debts totalled 38 billion euros, up 9.6 billion euros in the month with roughly two-thirds corresponding to Martinsa-Fadesa, which became the largest case of insolvency in Spanish history in July.

"If coverage falls to 50 percent, which we expect could happen, it is perfectly reasonable. I can see no situation in the real estate market where losses from defaults put this level of coverage in danger. Nevertheless, we will monitor events closely," the official said.

SOLVENCY NOT QUESTIONED

In a research note on Thursday, Credit Suisse said it expected non performing loans to rise to 3.3 percent by the end of 2010.

"We believe solvency is not an issue yet. We think banks could generate enough capital to cover 4 percent of their loan book before they need to raise cash or cut dividends," the note said.

Bad debts have tripled in the past year as property companies have folded and householders struggle with mortgage payments due to the collapse of a decade-long property boom and a sharp economic slowdown.

Savings banks, also known as cajas, have been hardest hit by the end of the real estate market and construction sector boom in the last year.

Standard & Poor's put Caja de Ahorros del Mediterraneo (CAM) (CAHM.MC) on CreditWatch in September after its coverage ratio had fallen to 50 percent from 107 percent three months earlier.

The savings banks held 871.5 billion euros of debt at the end of the second quarter before Martinsa filed for administration, with almost 70 percent loaned to construction and the real estate sector.

Commercial banks have put 54 percent of their total loans into the sector, figures showed on Thursday.

Bad debts from the sector are rising fast, with non performing loans for the cajas rising to 12.1 billion euros in the second quarter compared with 7.1 billion euros a quarter earlier. (Reporting by Paul Day; Editing by Ruth Pitchford)