(Writes through to update references to the ECB’s health check, adds detail on review method and samples)
By Sarah White and Jesús Aguado
MADRID, March 19 (Reuters) - Spanish banks, slowly emerging from a 2008 property crash, will have to revalue thousands of homes and commercial buildings to meet demands of European Union regulators who are assessing the sector’s financial strength, people familiar with the matter said.
Banks had been resisting fresh valuations, arguing previous estimates could simply be updated and fearing a costly and time-consuming reassessment that could lead to more provisions against soured loans, on top of multi-billion euro writedowns already taken in recent years.
Yet European Central Bank (ECB) regulators engaged in an asset review of banks across the euro zone have rejected such arguments and have demanded an up-to-date review of the worth of property portfolios, sources said.
The ECB declined comment on Spain specifically but said a consistent application of the so-called Asset Quality Review (AQR) exercise was fundamental. “A core aspect of the AQR in the area of collateral valuation is the use of third-party valuations and valuations dating before 1 January 2013 are not accepted,” it said.
As the process grinds its way towards completion due in October - with various deadlines for data before then - it’s not just banks in Spain which are affected. Lenders in other countries such as Germany have also been pushing for leeway on some aspects of the examination they fear may be too time-consuming or unnecessarily damaging, banking sources said.
Yet the situation remains sensitive in Spain, where the property market crash left banks with huge losses on assets whose value had plunged.
The asset review feeds into a broader “stress test” examination that will also look at how banks hold up under shock scenarios, and could reveal banks are short of provisions against some soured investments or loans.
Spanish banks had hoped the ECB would allow them to limit the scope of new valuations on properties used as loan collateral and foreclosed housing to save on time and costs, four banking and property sources said.
Backing that case, the Bank of Spain argued in talks with the ECB that the banks should be able to lean heavily on valuations from 2012 - when they underwent a stress test led by consultancy Oliver Wyman - and update them, the sources said.
That health check revealed a 60 billion euro ($84 billion)capital shortfall at Spanish banks and some needed to draw on a 41.3 billion euro aid package from Europe to cope.
The ECB is asking, however, for fresh sample valuations on property assets that have not been valued independently in 2013. Its exercise entails detailed reviews of 1 to 20 percent of banks’ riskiest portfolios, the results of which will be extrapolated to the rest of those assets.
Sources could not say what proportion of those assets would be involved.
One of the three banking sources said the ECB had rejected Spanish banks’ requests, while others acknowledged lenders were likely to hire consultants to look at parts of their portfolios.
Such a process can cost millions if not tens of millions of euros, depending on the size of portfolios. Oliver Wyman was paid just over 10 million euros for its 2012 review in Spain.
“If we follow the methodology, there will have to be new valuations, and a task force will be needed to provide new external valuations,” said one of the sources, a banker involved in risk management.
A spokesman for the Bank of Spain declined to comment on whether it had discussed the matter with the ECB, but said: “The ECB’s manual on AQR is there to be followed.”
Spain’s top seven listed lenders - Santander <SAN .MC>, BBVA <BBVA .MC>, Caixabank, Bankia, Popular , Sabadell and Bankinter - declined to comment.
Some bankers say they do not expect any nasty surprises, either from the whole review exercise or from new valuations. “Most portfolios are well covered by provisions,” a senior banking adviser in Madrid said.
Many Spanish assets do have recent valuations, since every time a property is repossessed it is usually revalued and collateral used for new mortgages also carries new valuations.
Some banks have already been going over mortgage portfolios in recent months and are close to finishing that process, a fourth banking source said, while Spain also has data from 2013 when bailed-out banks like Bankia transferred real estate to external “bad bank” Sareb, which would be useful as benchmarks.
“With everything that has been transferred to Sareb and reviewed in the last 12 months, there are many fresh references for every city and type of asset,” another independent banking adviser said.
Yet the Spanish property market remains weak, leaving scope for current valuations to be less than banks have assumed. House prices were down an average 7.8 percent in the fourth quarter of 2013 compared with a year earlier, official data shows, and though the sector shows signs of stabilising, prices were still down 1.3 percent from the prior three months.
One major factor for banks facing property revaluations is simply the amount of work to do in a relatively short time. Some banks have argued there would not be time to carry out exhaustive valuations, a senior bank manager said, adding that over 1 million properties had been valued during the 2012 exercise, with thousands physically inspected.
“For us this is going to mean more time and more expense,” said a third banking source. ($1 = 0.7180 euros) (Additional reporting by Eva Taylor and Andreas Kroener in Frankfurt; Editing by David Holmes)