FIG Watch – Carlos Stilianopoulos: Caja Madrid reins in mortgage book growth

"We don’t want to grow this fast. We are a savings bank so we don’t have to keep shareholders happy. We prefer to have a solid institution"  Carlos Stilianopoulos, Caja Madrid

The initial conclusion to draw from this is that Caja Madrid has concerns about the Spanish mortgage market – not a positive development for an institution that has a €55 billion mortgage book. But Stilianopoulos is emphatic that this is not the case. "The mortgage market is still attractive to us – we simply want to cut growth from the mid-20s to the mid-10s," he says. "But that is still huge in absolute figures. We still believe strongly in the mortgage market and want to be there."

The rapid growth in its mortgage book prompted Caja Madrid to enter the Spanish RMBS market at the end of 2006, but this is something that the bank seems similarly equivocal about. The deals were done because the mortgage book had reached such a size that there was 250% collateral for outstanding cédulas. This ‘excess’ collateral could therefore be securitized without having an impact on the covered bond programme. "The RMBS deals have been done purely for funding – to avoid oversupply in the cédulas market," explains Stilianopoulos. "The cédulas market always comes first and we will always maintain 200% collateral for our cédulas issuance." If cédulas collateral levels fall back to 200% then future RMBS issuance from the bank will cease.

Caja Madrid was a prominent sponsor at the inaugural Euromoney US covered bonds conference in March, and few would be surprised if it were to issue US dollar-denominated cedulas.

"Last year we were faced with a record increase in our funding needs to €22 billion – the year before it was €15 billion," says Stilianopoulos. "We knew that we didn’t want to use our normal senior and cédulas investor bases for the whole €22 billion." The solution was to fund in the RMBS market – something that Stilianopoulos was discounting as recently as May last year  (see Is this the time to buy Spanish MBS?, Euromoney, June 2006).

Big deals

Caja Madrid has €18 billion outstanding in the cédulas market – so the €3.8 billion of RMBS that has been issued so far is a relative drop in the ocean. The bank launched its first RMBS transaction in late November last year – a €2-billion deal with an average LTV of 95.3% and average seasoning of 19.6 months. The deal, which was led by Barclays Capital and RBS, priced at 16 basis points over Euribor at the triple-A level for a 5.26-year weighted average life, just 1bp wider than regular issuer Bankinter’s 13th deal, which came at the same time. A second, €1.8-billion deal rapidly followed, this time pricing at 15bp over for a 3.8-year WAL for the triple-As. All sub-triple-A tranches in both deals were retained or sold privately. "Some banks tried to tell us that the two deals were too close together," says Stilianopoulos. "But the first transaction was three times oversubscribed and the second two times. And even though the deals had LTVs above 80% they were placed at exactly the same spread as outstanding secondary."

This is good news for Caja Madrid, but it also shows a worrying lack of discrimination among investors as regards the real risk they are taking on. The average LTV of the mortgages in the two Caja Madrid deals so far is 90%, but other lenders have gone to 110% LTV in recent years, with more lending to self-employed and second-home buyers. Some observers have long argued that spreads on Spanish RMBS deals do not accurately reflect the real risk inherent in this market (see Is this the time to buy Spanish MBS?, Euromoney, June 2006) and parallels between the Spanish mortgage market and the US sub-prime mortgage market have even been drawn in recent weeks, although they have not really been made to stick. Stilianopoulos is dismissive of the concerns that have been voiced. "There is concern over the Spanish housing market but it comes from abroad. We are not concerned – there are strong fundamentals underpinning the market. Perhaps in other countries this pace of growth would be seen as a bubble, but not in Spain." He justifies this position by pointing to the immigration that Spain has experienced from Latin America, eastern Europe and north America, explaining that demand for housing is driven by natural population growth. "People are coming to Spain to work – they have jobs," he says. Indeed, residential construction in Spain has reached 11% of GDP and last year roughly 18 houses per 1,000 people were built in Spain compared with the European average of fewer than six. But a sizeable proportion of these immigrants will be employed in the construction industry, so any slowdown in this breakneck pace of development might indeed hit their ability to service their mortgages.

LBO boom

Caja Madrid’s leveraged finance underwriting

Source: Caja Madrid