Spain’s banks have a capital deficit of euro 59.3 billion ($76.3 billion), less than previously estimated, according to a test designed to lift doubts about the financial industry’s ability to absorb losses.
The Bankia group, a nationalised lender, had a euro 24.7-billion deficit and Banco Popular Espanol had a euro 3.22-billion shortfall in stress tests conducted by management consultants Oliver Wyman and released on Thursday. The tests of 14 lenders showed no deficit for seven including Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and Banco Sabadell SA, the Bank of Spain and Economy Ministry said in a statement.
Spain commissioned the stress test as part of terms to win a European bailout of as much as euro 100 billion for its banking system after more than euro 180 billion of losses linked to souring real estate. Demonstrating how lenders would bear an extreme scenario — a three-year economic contraction — is part of the government’s drive to show it’s fixing the economy while debating whether to seek another rescue package.
“The tests look credible with good methodology and it’s what Spain needed to do, but the market is still going to test them,” Luis Garicano, an economy professor at the London School of Economics, said in a phone interview.
The total capital deficit is less than the euro 62 billion Oliver Wyman estimated in June that banks would need. The euro 59.3 billion shortfall number doesn’t account for mergers under way and deferred tax assets. With mergers and tax effects, the amount is euro 53.7 billion, according to the statement.
Shortfalls, surpluses
Spain may end up needing about euro 40 billion of European funds for its banks, less than the stress-test shortfall, Deputy Economy Minister Fernando Jimenez Latorre said in a news conference in Madrid.
That’s because a so-called bad bank set up to house soured assets will help lenders reduce their capital needs as they also raise funds by selling businesses, he said. Spain, which will create such a vehicle under the terms of its banking bailout, will describe the criteria for doing so next week, Jimenez Latorre said.
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In its worst-case scenario, Oliver Wyman said it assumed a real decline in gross domestic product of 4.1 per cent in 2012, 2.1 per cent in 2013 and 0.3 per cent in 2014, and estimated that unemployment would rise to 27.2 per cent in two years’ time. Barclays Plc predicts Spanish gross domestic product will shrink 1.8 per cent in both 2012 and 2013. Morgan Stanley forecasts a 2.2 per cent decline this year and 1.3 per cent next.
Doubts remain
The tests factored in Spanish 10-year debt yields of 7.4 per cent this year and 7.7 per cent in 2013 and 2014, Oliver Wyman said. The adverse scenario would mean retail mortgage default rates of 4.1 per cent while accumulated projected losses on real estate developer credit would reach 43 per cent of loan balances, the firm said.
The International Monetary Fund and the European Central Bank backed the stress test results. Even so, the exercise didn’t convince all analysts.
“They went to all this trouble but what they came up is a result that probably won’t change the opinions people had formed in June,” Daragh Quinn, an analyst at Nomura International in Madrid, said in a phone interview. “They’re still not going to convince people that they’ve definitively drawn a line under Spanish bank risks.”
Oliver Wyman’s use of six per cent as the core capital ratio threshold in its worst-case scenario is a concern for some analysts, Quinn said. The equivalent effective rate used by Ireland for its stress test, including a buffer, was nine per cent.
Popular plan
The seven banks with capital deficits in the adverse scenario also include the nationalised lenders Catalunyabank and NCG Banco, with a euro 10.8-billion and euro 7.2-billion shortfall, respectively, according to the statement.
A group including Ibercaja, Caja3 and Liberbank had a euro 2.1-billion deficit and the Unicaja and Caja Espana-Caja Duero group a euro 128-million surplus, the results show. Santander had a euro 25.3-billion surplus and BBVA’s was euro 11.2 billion. CaixaBank and Banca Civica had a combined euro 5.7 billion surplus, while Bankinter SA’s totaled euro 399 million.
Popular repeated its position that it won’t seek state aid and will present a business plan and strategy to bolster capital shortly, the Madrid-based lender said in a filing to regulators. The test results follow the Sept. 27 announcement of Spain’s 2013 budget, which outlined the government’s plans to freeze public wages, end tax rebates on mortgages, tax lottery winnings and cut ministry spending. Spain is committed to cutting its budget deficit to 4.5 per cent of economic output next year compared with a 6.3 per cent goal for 2012.
Loan quality
The stress tests analysed 36 million loans and eight million guarantees using information from the databases of lenders and the Bank of Spain, according to the statement. A team of more than 400 auditors verified the quality of loans by examining 115,000 loan operations. The Oliver Wyman stress test follows government orders to banks in February and May to recognise euro 84 billion of losses on real estate assets and a royal decree last month that lays out a legal framework for dealing with failing lenders and setting up a bad bank to isolate soured assets.