April 29, 2008 / 2:00 PM / 11 years ago

UPDATE 1-Moody's sees clouds over Spanish banking sector

(Releads with outlook on banking sector)

By Jane Barrett

MADRID, April 29 (Reuters) - Moody’s rated the outlook for the Spanish banking system negative on Tuesday, based on a sharp slowdown in the property market, funding difficulties and high household debt.

The credit rating agency also downgraded some small unlisted Spanish savings banks and put larger rivals on review for possible downgrade as ever more clouds gather over the Spanish economy.

Growth in the euro zone’s fourth-largest economy is expected to halve this year from last year’s 3.8 percent while unemployment is rising much faster than thought, hitting 9.6 percent in the first quarter.

“The likelihood of a hard landing has increased and some institutions are more vulnerable to such a scenario,” said Moody’s, which rates Spain Aaa. It added that authorities could step in to support banks if they got into very deep trouble.

Moody’s cut its ratings on Caja Insular de Ahorros de Canarias, Cajamar, Caja de Ahorros de Avila and Caja de Ahorros y Monte de Piedad de Segovia — among a swathe of small banks that mostly lend to local businesses and families.

Bancaja, Caixa Catalunya, Caja de Ahorros del Mediterraneo (CAM), Caixa d’Estalvis de Tarragona and Caixa d’Estalvis de Terrassa were put on review for possible downgrade.

Moody’s said it was worried about some banks’ exposure to real estate developers and construction companies, bloated property markets in Madrid and along the Mediterranean coast, and lenders that hold land, whose value is slipping.

Several property and building companies have filed for administration as sales slump — down 24.4 percent in February — leaving them without the cashflow to pay back debts.

Moody’s expected corporate insolvencies to rise in the rest of 2008, along with more families defaulting on mortgages.

At Colonial (COL.MC), once Spain’s biggest property firm, banks including Bancaja have taken on shares as part-payment for debts held by its former owner Luis Portillo.

Moody’s said the Spanish banking system should be resilient because it is rooted in customer relations rather than structured finance, but warned some savings banks may have signed up poor-quality customers in a battle for growth.

It also said Spanish banks still had very low bad-loan rates — around 1 percent — and had plenty of unrealised capital gains, provisions and assets they could eventually pledge to the European Central Bank if they needed liquidity. (Additional reporting by Andrew Hay; Editing by David Hulmes)

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