Fitch Ratings has slapped Spain's main banks with a negative outlook.
In a report published on Tuesday, the credit ratings agency says:
The outlook for Spain's major banks is negative and it has a Rating Watch Negative (RWN) on most of the large Spanish banks' IDRs.
"A further intensification of the eurozone crisis, a deteriorating macro environment within Spain and across Europe, increased market volatility and risk aversion, could negatively affect bank credit profiles," says Maria Jose Lockerbie, managing director in Fitch's Financial Institutions group. "The weak economic environment in Spain, high unemployment and property-sector problems will continue to constrain banks' business volumes, as well as eroding asset quality."
For 2012 and 2013, Fitch projects Spanish GDP growth of 0.0% and 1.0%, respectively, revised down from 0.5% and 1.5% previously.
While the purely domestic banks face significant challenges, the geographical diversification of the international banks, Banco Santander, SA (Santander, 'AA-'/RWN) and Banco Bilbao Vizcaya Argentaria (BBVA, 'A+'/RWN), gives them the ability to make up for muted results in Spain. Their retail banking focus in core international markets provides stability to group earnings. However, both have significant Spanish presences. BBVA has over half of its assets in Spain and Santander around 30%.
Real-estate exposure is still a sticking point for the ratings agency, as Fitch said this remains a big risk for the large Spanish banks, particularly for the domestically focused institutions:
The non-performing-loans (NPL) ratio for the entire sector stood at 7.2% at end-September 2011 (real-estate sector alone: around 18%). Moreover, given the potential for a recession, deterioration in SME lending can be expected. Conversely, despite high unemployment, the NPL ratio for residential mortgages was 2.4% at end-June 2011 and is not expected to worsen significantly.
In December, Euromoney pointed out that ex-HSBC chief executive Michael Geoghegan’s recent study of Ireland’s National Asset Management Agency (NAMA) is a warning for Spain, as the Spanish government looks to possibly setting up a bad bank to deal with its real-estate problems.
Moreover, Euromoney also revealed how as a seventh bank in Spain is taken under state control, Spain faces a race against time to deal with its bad real-estate assets before they contaminate the entire banking sector. A bad bank could be the only solution, despite opposition from bankers and politicians.
Spain has been dogged by its bad real estate, and in November, Euromoney illustrated how this bad real-estate lending could leave Bankia holed below the waterline.
On December 8, the European Banking Authority (EBA) announced that European banks must raise €114.7 billion of additional capital buffers by June, so 8% more than its initial estimate of €106 billion.
Spain did not fare well, in comparison to other EU countries, as the following example reveals the shortfall Spanish banks face:
| BANKS INDIVIDUAL RESULTS
Country Bank Bank Code Shortfall
millions in €
| Source: European Banking Authority
However, despite Fitch turning the outlook to negative for the major Spanish banks, it said in its report that (emphasis ours):
Most analysts agree that the EBA’s plan is something of an irrelevance because it fails to address the main challenge facing European banks today, their inability to raise term funding.
The ECB, of course, is addressing this, by providing longer-term loans against increasingly weak collateral. That leaves the EBA to indulge in what some might see as wishful thinking.
The deterioration in funding conditions for the Spanish sovereign due to the eurozone debt crisis has affected banks' funding costs and access.
Weak loan demand and the European Banking Authority's 9% core capital requirement by end-June 2012 have accelerated deleveraging in Spain, with banks granting loans only selectively.
Capital at most of the major banks needs strengthening.
In the case of Santander and BBVA, capital is affected by large goodwill. EBA requirements call for €26 billion in additional capital for the major Spanish banks by end-June 2012. Steps have been taken and they will achieve the new level through a combination of internal capital generation, the conversion of mandatory convertible securities, risk-weighted asset optimisation and asset sales.
- Euromoney Skew Blog