Spain’s banks may not survive without aid or bailout
Spain’s banks are fast joining the ranks of the most unloved in Europe, with many needing to raise capital urgently, deserted by investors who believe the country is on the brink of a recession that many lenders will not survive.
The Madrid government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily indebted local savings banks. That leaves two options: raising private capital or turning to the EU for bailout funds.
Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks’ growing bad loans, their holdings of shaky sovereign debt and the worsening economy.
Already battered by a property market crash that began four years ago and continues unabated, few Spanish banks are able to borrow funds on wholesale credit markets and the majority are instead relying on the European Central Bank.
“Most are currently on liquidity life support from the ECB but asset quality continues to deteriorate as house prices keep falling and unemployment is still rising,” said Georg Grodzki, head of credit research at Legal & General Investment Management in London.
“Their funding remains constrained and competition for deposits intense,” he said.
Markets are showing the strains. The cost of buying protection against a default on bonds issued by the two biggest banks, Banco Santander and BBVA, has risen sharply in the past month.
Santander chief executive Alfredo Sáenz said the ECB had helped by injecting more than €1tn into the eurozone financial system in recent months, supporting banks as they try to cope with losses inflicted by the sovereign debt crisis.
Nevertheless, Spain still needs to speed up bank restructuring and recapitalisation, push ahead with auctioning two nationalised savings banks and cut the number of institutions in the country, he said.
“The cheap financing provided by the ECB’s three-year liquidity funds has been a positive step. It is a beginning but that is clearly not enough,” Mr Sáenz said.
European money market funds rated by Fitch already added Spanish bonds to a blacklist of unappealing creditors comprising Greek, Irish and Portuguese names in the final quarter of 2011, the ratings agency said last week.
As the conservative government sets about slashing the budget deficit, it has rejected a state-funded rescue. It also insists it will not follow the other troubled eurozone states by turning to the troika of the European Commission, ECB and International Monetary Fund for a bank bailout.
However, Bill O’Neill of Merrill Lynch Wealth Management said nobody should assume that ECB support via the cheap loans will be limitless. Spanish banks’ provisions against bad loans could fall short if, for instance, property prices were to plunge by more than 50% from their peak.
A wave of consolidation aimed at weeding out the weakest lenders will cut their number to 10 from 40 but even those expected to survive are struggling to find favour.
“People are asking questions about the way banks are raising capital, through accounting, merging and amortising losses over two years,” said one London- based bank analyst. “It’s a kind of capital-less capital raising.”
Bankia, created by a merger of seven regional banks, or cajas, has caught the eye of hedge funds which are betting on a dip in its share price in the near-term.
Typical loan-to-deposit ratios, a measure of financial strength, show Spanish banks are already lending more cash than they have on deposit and the ratio is set to widen even further as unemployed Spaniards plunder their savings.
Paul Vrouwes, senior financials manager at ING Investment Management, said: “I think that Spanish banks will have to pay a lot more to investors like me to raise funds in the future. I am not so sure how they will manage when the ECB money needs to be paid back.”
— Reuters
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