Spain is the new Ireland, subordinated bank debt edition
Investors trying to understand recent developments in the troubled Spanish banking sector could do a lot worse than looking to Ireland as a comparison, according to Barclays Capital.
How do you say luck of the Irish in Espagnol? Analysts at Barclays Capital had a stab today with research that revealingly draws comparisons between the Spanish and Irish banking systems, and analogies between the two abound, in their view. Most notably, both countries are experiencing severe real estate market adjustments, as large imbalances accumulated over the decade prior to 2008 correct. The main cause for concern, of course, is the negative impact of soaring Irish loan losses on subordinated bank bondholders, and in turn what this could mean for subordinated bondholders in Spanish banks.
“Loan losses soared in Ireland: It has been four years since the Irish lending boom came to an end, and the implied loss rate on all Irish bank loans based on the most recent provisioning data is 24%.”
“Eventually leading to realised losses for subordinated bondholders: The real estate- related loan problems at Irish banks eventually caused subordinated bondholders to accept substantial realised losses. On average, subordinated bondholders recovered approximately 20% of par value.”
And so the chief concern then is that:
“Spanish banks have subordinated debt that could be used for burden sharing: In light of the similarities with Irish banks and the expected need for government capital injections into the Spanish banking system, the question of whether Spanish subordinated bondholders will eventually meet the same fate as their Irish counterparts becomes a legitimate one.”
However, Barclays’ analysts points out that there are three primary differences between the two countries that suggest the outcome for Spanish subordinated bondholders will be different to that of Irish subordinated bondholders:
1. Expected loss rate on loans 2. The ability of the government to support the banking system 3. The amount of subordinated bonds held by retail investors.
Nonetheless, Barclays concludes:
We believe that key differences between the Irish and Spanish banking systems could lead to different outcomes for bank bondholders. Loan losses in Spain are on pace to be lower are than those seen in Ireland. In addition, the potential cost of public sector support remains manageable for the Spanish government, with public debt peaking at 91.5% of GDP under our base case.”
“Although bank bondholder involvement could help reduce Spain’s debt burden, authorities may avoid coercive burden-sharing because of elevated retail ownership of subordinated bank debt. Nonetheless, we acknowledge that there is downside risk to our base case loss estimates and that the risk of burden-sharing for subordinated bondholders of Spanish banks is material. We remain cautious on Spanish banks and reiterate our Underweight recommendations on Santander and BBVA
Whatever the cultural differences between Spain and Ireland, the similarities between their banking sectors looks pretty stark.