(The following statement was released by the rating agency)
Feb 05 - Six of the largest Spanish banks reported substantial loan impairment provisions to cover real estate exposures in their FY12 results last week, improving their coverage, Fitch Ratings says. This led to a significant reduction in net income or losses, despite better-than-expected revenues and strict cost control. Real estate exposures remain the key weakness for the bulk of the Spanish banks and there is also a risk of a continued spill-over of impaired loans into other segments, especially as we believe the economy will contract further this year.
Even the two international Spanish banks, Santander and BBVA, reported a drop in profit of 59% and 44%, respectively. The decline is mainly attributable to the provisions on domestic real estate exposures. Earnings from other geographies, most notably Latin America, helped offset the charges. Both banks have been proactive in tackling their Spanish real-estate exposures. They have accelerated the sale of these assets ahead of the potentially even more challenging market that may emerge once the Spanish bad bank, Sareb, starts its run-down and disposal programme.
Domestic revenues have held up reasonably well despite the weak economy, lower customer volumes and bank deleveraging. Net interest income has risen at all six banks, helped by close spread management, particularly on new and rolled-over loans, and carry trades on sovereign bonds at some institutions. These banks have benefited from a flight to quality for deposits and have been able to adjust pricing accordingly, despite competition for funding. Their retail focus and cross-selling efforts meant commission income held up well. Costs continue to be well managed.
We estimate that these banks' exposures to domestic real estate will be 40% to 50% covered. Further deterioration can be expected on the real estate portfolio, but a large scale effort has already been made with the bulk of these banks entirely complying with the two royal decree laws passed during 2012. Like the two international banks, CaixaBank, Banco Sabadell and Banco Popular are making substantial efforts to sell real estate exposures parked in their internal bad banks. Bankinter has much smaller exposures to real estate.
2013 will be another very challenging year as we expect domestic GDP to fall a further 1.6%. A deterioration in the SME books and in residential mortgages can be expected, considering the recession and rising unemployment. Further deleveraging, low interest rates and large stocks of impaired assets would depress net interest income. Higher spreads on renewed loans could mitigate some of this pressure.
Encouragingly, investor appetite for Spanish senior and covered bonds from the main players has recently increased. As the issuance opportunity may be short-lived, most institutions continue to reduce the funding gap by shrinking loans and attracting retail deposits. But the latter may become more challenging following the recently proposed deposit rate caps.
Banks have begun to prepay a substantial proportion of long-term refinancing operation (LTRO) funds to the European Central Bank, most notably Santander. We expect the smaller players to be more cautious about the potential for market conditions to change. They are more likely to hold on to the LTRO funds for insurance or even for carry trade purposes.
Link to Fitch Ratings' Report: 2013 Outlook: Spanish Banks