Spanish banks display their risky appetite for property

They are officially banks but they have become Spain’s main real estate agents, according to data from the country’s banking sector which reveals the extent of their risky property assets.

The Bank of Spain had asked all 17 of the country’s fragile regional savings banks, which account for about half of all lenders, to supply it with details of their exposure to the collapsed real estate market.

Unsurprisingly, the savings banks held far more risky assets than the main banks, based on a calculation of the figures earlier this month by AFP.

The nation’s seven main banks held EUR 45 billion (USD 61 billion) in risky assets and the 15 savings banks that have so far published their figures had around double that to EUR 90 billion.

The difference is due to the huge amount of mortgage loans — some EUR 164.9 billion worth — that the savings banks handed out during the property bubble, whereas the main banks only issued some EUR 77.5 billion.

The savings banks are at the heart of market fears that Spain could need a bailout like the ones granted Ireland and Greece last year.

If the savings banks are unable to cope with losses from their exposure to the collapsed property sector, investors fear they will need massive government help.

But analysts noted that the total declared amount of risky assets, EUR 135 billion, is much less than the Bank of Spain’s estimate at the end of June, which put figure at at EUR 180.6 billion.

"The numbers that emerged were generally below those of market estimates," said Juan Jose Fernandez-Figari, an analyst with Spanish brokerage firm Link Securities.

"The numbers that the market could cope with, in the worst case scenario, were much higher than what we’re hearing about" now, said Jose Luis Martinez Campuzano, a strategist at Citi. And "the market response is very positive."

Since the first figures began appearing earlier this year, the Madrid stock exchange has gained almost 10 percent.

Of the EUR 90 billion in risky property assets held by the savings banks, EUR 29.4 billion are non-performing loans, or those that may not be repaid, and EUR 27.5 billion of "sub-standard" loans at risk of default. The bad loan rate even reached as high as 45 percent at the Cajasur BBK savings bank.

The savings banks also have EUR 33.1 billion of real estate assets from seizures, the value of which approximate because they have depreciated since the bubble burst on the country’s property market in 2008.

The largest savings bank group, Banco Financiero y de Ahorros — the product of a merger of seven banks — has thus become "the largest Spanish real estate agency and the top private owner of land," the leading daily El Pais said last week.

Now "the key is to know how much these assets are really worth," said Fernandez-Figari, as the sector has depreciated by about 30 percent and made provisions to cover potential losses.

"It will probably increase the provisions," said Martinez, because property will continue to lose value in a country where homes for some 80 million people were built when the total population is just 47 million.

"If the weakness in sales seen in 2010 continues (in 2011), new provisions will be necessary," Spain’s third largest bank, Banco Popular, acknowledged.

The key is fiscal transparency so "that the markets have a more accurate picture of actual exposure to the real estate sector," said Fernandez-Figari.

Martinez agreed that "fundamental thing is to find capital", as the government has called on the banking sector to come up with EUR 20 billion by September.

Katell Abiven / AFP / Expatica