Spain pressurises banks for €30bn provision

Spain will force banks to increase provisions against real estate loans by about €30bn and will hire two auditors to value lenders’ assets in a fourth attempt to clean up the industry.

Banks will have to raise provisions on still-performing property loans to 30% from 7% on average and the government will provide funds for those that need support, Spain’s economy minister Luis de Guindos said yesterday in Madrid.

The state will inject less than €15bn into struggling banks, and the funds won’t add to the budget deficit, he said. The government will also force all banks to move foreclosed real estate assets off their balance sheets into independently managed companies so they can be sold, said de Guindos.

“It’s a significant step in the right direction, particularly the approval of an independent audit, and provides a measure of reassurance that Spain is coming to grips with its banking troubles,” Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London specialising in sovereign-credit risk, said in an email.

“Yet this is not the definitive clean-up framework that the market is clamouring for.”

The latest bid to cleanse the banking system after efforts in 2010, 2011, and February this year is part of Prime Minister Mariano Rajoy’s effort to dispel doubts about hidden losses at lenders that have driven up the country’s borrowing costs.

Spain’s 10-year bond yield jumped to 6.05% after the measures were announced, before retreating to 6.01% by 4pm in Madrid. Shares in domestic banks declined. Banco Popular Espanol was 9 cents lower at €2.07. A spokesman said the bank would not take state aid as a result of the additional provisions. CaixaBank fell 3.6%.

The announcement follows the state’s May 9 takeover of Bankia, the banking group with the most real estate, in another step to bolster confidence in a financial system burdened by €184bn of assets the Bank of Spain terms “problematic.”

Spain will boost provisioning on still-good land assets to 52% from the 7% level set for all types of real estate risk in February, said de Guindos. It will raise the coverage level on loans linked to unfinished buildings to 29% and to 14% for finished homes. The new rules will raise coverage for real estate assets to 45%, he said.

De Guindos said that banks will be given a month from yesterday to say how they intend to meet the provisioning requirements, which come on top of the €53.8bn of charges and capital ordered by the government in the previous cleanup effort in February. A spokesman for Banco Sabadell said by phone it could make the provisions this year and stay profitable.

— Bloomberg

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