Spanish banks under pressure from ratings agencies

Spain’s government suffered yet another blow in its efforts to ease market fears over its economy on Tuesday when two of the country’s major banking groups were assailed by top ratings agencies.

Fitch Ratings downgraded the long-term default rating of Banco Sabadell from A to A+ due to its “real estate development sector exposure … and Spain’s weak economic environment and prospects.”

It peer, Standard & Poor’s, meanwhile warned it could downgrade savings bank Caja Madrid, putting it on “CreditWatch negative.”

On Friday, Fitch cut Spain’s credit rating one notch from the maximum AAA to AA+ due the country’s poor growth prospects, just a day after the embattled government pushed through an austerity plan designed to address market fears of a Greek-style financial crisis.

The latest ratings actions came as the European Central Bank warned that eurozone banks might have to take more write-downs totalling 195 billion euros (240 billion dollars) by 2011 to cover losses in the global slump.

“Fitch expects that 2010 and 2011 will remain challenging for the bank as Sabadell’s performance is highly correlated with the Spanish economy, which has suffered from a sharp downturn in the property sector,” Fitch said in a statement.

But it said that “despite the expected decline in net interest income and continuing high impairment charges, Sabadell should be able to report reasonable profitability levels.”

Banco Sabadell reported first-quarter net profits down 33.1 percent at 108.38 million euros (132.6 billion dollars).

S&P said its decision to put Caja Madrid on ‘CreditWatch negative’ “reflects the possibility that we could downgrade (the bank) … based on our view that its financial profile will likely continue to weaken in 2010 and 2011.”

Spain’s leading daily El Pais Tuesday said Caja Madrid could ask for up to three billion euros (3.7 billion dollars) from the state rescue fund to shore up its accounts.

Spanish banks got off relatively lightly from the US subprime mortgage crisis in 2008 as the country’s strict regulations meant they did not invest heavily in the high-risk loans that hurt financial institutions elsewhere.

But many, especially smaller unlisted saving banks that are usually controlled by regional politicians and which account for half of total loans, were badly hit by the collapse of the country’s once-booming property market, both through loans to developers and mortgages.

The ECB said in its twice-yearly Financial Stability Review that eurozone banks faced several challenges, including exposure to a weakening commercial real estate market, hundreds of billions of euros in bad debts and possible competition for refinancing with governments trying balance their own books.

Banks need to refinance long-term debt of around 800 billion euros (980 billion dollars) by the end of 2012, the ECB noted.

The Spanish economy entered recession at the end of 2008 and only emerged with tepid 0.1 percent growth in the first quarter.

In the last few weeks, there has been growing tension on the Spanish debt market because of high Spanish budget deficits.

In 2009, the public deficit shot up to 11.2 percent of Gross Domestic Product, nearly four times the EU limit, pushing the interest rate demanded by investors to buy Spanish debt.