Research Dept. News
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Monthly Report, num 359 - July-August 2012
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Spain: overall analysis - Savings and financing
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A blast of oxygen for Spain's banks
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Europe could force the creation of a «bad bank» in exchange for bailing out the banking sector.
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On 25 June, the government asked the Eurogroup for financial aid to recapitalize those banks that needed it. This request marks the end of a first six months of the year packed with regulatory changes in Spain's financial framework. Previously, the bank reforms passed in February and May, with the aim of sorting out the banks' real estate portfolio, were not enough to dispel doubts regarding the sector's solvency. There are many questions raised by this new scenario. Over the coming weeks, we hope to find out the details of aid that will determine the future for the country's banking sector.
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Aid to the sector will arrive via a line of credit to the Orderly Bank Restructuring Fund (FROB in Spanish) for up to 100 billion euros. Awaiting more details regarding the terms of this aid, the loans will most likely be long-term and at an interest rate of between 3% and 4%; i.e. lower the cost of financing 10-year public debt.
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The main focus of attention is still the amount required to recapitalize Spain's banks. According to the reports drawn up by the two external evaluators, the capital requirements of Spain's banks within a scenario of severe economic deterioration would range from 51 to 62 billion euros. These figures are far below the maximum amount granted for the line of credit. However, the final amount could vary depending on the results of more detailed audits of each bank's balance sheet, which will be presented on 31 July.
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In this respect, both the external evaluators and the International Monetary Fund agree that the larger banks are sufficiently capitalized. The rest will very probably need public aid. Those banks currently bailed out by the FROB and nationalized institutions will require the greatest injection of capital. In exchange for financial assistance, the Eurogroup will impose conditions for the sector as a whole and particularly for those banks that have been bailed out. Among the most likely measures is the creation of an entity («bad bank») to hive off troubled real estate assets from the banks' balance sheets.
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The impact of this bail-out has two clear sides to it: on the one hand, it will increase the public debt and deficit, the latter through interest payments for the line of credit. In the long term, however, the effect on the public treasury will not necessarily be negative, as the gains from the positive spread between the loan's interest rate and the rate paid by the FROB could be substantial. Something similar happened in the United States with its programme to relieve troubled assets (TARP). On the other hand, the conditions imposed on banks could lead the sector to a new restructuring process.
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Credit to the resident private sector falls by 3.5% year-on-year in April.
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This uncertainty regarding the capital requirements and aid conditions is also likely to speed up the rate that credit is granted over the coming months, especially in the case of the bailed-out banks. In this respect, credit to the private sector fell by 3.5% year-on-year in April, intensifying the deleveraging process. According to the bank loan survey for the first quarter, this drop is also due to demand factors as, between January and March 2012, the number of applications for credit decreased significantly.
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The financing of real estate activities falls by 12.2% year-on-year in the first quarter of 2012.
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A breakdown of the credit by sector and activity shows that this drop was virtually widespread. In the first quarter of the year, credit to households fell by 2.7% year-on-year, boosted by the drop in financing for the consumption of durables, namely 12.8% in the same period. For their part, bank loans to firms were down 3.8% compared with the first quarter of 2011. Of note is the sharp contraction in financing for real estate activities, i.e. construction and development, down 12.2% year-on-year, whereas credit to the services sector, excluding real estate development, remained practically stable.
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This fall in credit has been accompanied by a further rise in doubtful loans in April, to 8.72%, 36 basis points above March's level. A breakdown by sector shows that those areas where doubtful loans have increased the most over the last year are also the areas with the highest drop in financing. Undoubtedly, of note is the severe decline in the development portfolio, the Achilles heel of Spain's banks, which in March had already reached a non-performing loan (NPL) rate of 22.1%, 7.4 percentage points above its level a year ago. This is followed, albeit at a long distance, by agriculture, with an NPL rate of 7.0%, representing a rise of 2.7 percentage points in one year.
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Doubtful loans increase to 8.72% in April.
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With regard to household credit, its NPL rate reached 3.8% in March. This ratio is relatively low, especially if we take into account the severe deterioration in the labour market. One of the reasons could be the renegotiation of mortgage terms to thereby make it easier for this debt to be repaid. According to data from the National Institute of Statistics, the number of mortgages that altered their terms in April rose to 26,494, 16.4% more than in the same month of 2011. Of these, 36.4% changed the interest rate conditions, presumably downwards.
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The outstanding bank bond balance multiplies by 2.6 between September and April.
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In this respect, the trend for the 12-month Euribor rate, the reference rate for most mortgages in Spain, has also helped to keep household bad debt at a controlled level. In May, this indicator stood at 1.27%, very close to the minimum recorded in 2010.
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In spite of this lower mortgage burden for households, deposit figures have failed to increase. In April, the bank deposits of households and firms had fallen by 5.4% compared with the same month in 2011. Of note was the drop in term and sight products, by 5.6% and 7.3% year-on-year respectively. However, this drop does not necessarily mean that savings have fallen, as there is also greater competition from products offering higher returns, such as public debt or bank bonds.
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In this last case, according to figures from the Bank of Spain, the outstanding balance for bank bonds has multiplied by 2.6 between September 2011 and April 2012, totalling just over 43 billion euros. This increase partly offsets the fall in bank liabilities. However, we expect the additional rises in the yield on Spanish sovereign debt over the last few months to continue to encourage the replacement of deposits with other, short-term products.
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In summary, Spain's banks are undergoing far-reaching renovation but the aid provided by Europe will help to tackle this successfully. It is a long road but, at its end, Spain will be able to benefit from a wholly solvent banking sector.
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