IEB Believes Real Estate Load to Cripple Banks at the Stress Test

“The most troublesome are loans granted to real estate sector, whether or not they have guarantees and if the guarantees values are up-to-date”, explains Enrique Pérez–Hernández, professor at the Instituto de Estudios Bursátiles (IEB), asked what in his opinion represents the largest weakness of the Spanish banks facing the looming stress test of the European Central Bank.

However, in spite of risk and punishment the sovereign loan portfolios cast on the banks, they are going to pass the examination.

Banks still own a €81 billion worth of repossessed assets and real estate vulnerability of €174 billion if developer loans and €50 billion in assets transferred to Sareb added.

Basic scenario in the AQR (Asset Quality Review) tests assumes additional fall in housing prices of 4.3% this year and a rebound in 2015. Another hypothesis predicts that in 2014 the values might drop by 7.4%, by 3% in 2015 and start rising again by 0.9% in 2016. Accumulated discount in the basic scenario stands at 8.9%, whereas for the half of the European Union it shows an eventual decrease of 19.2%.

Spanish banks now hurry to meet requirements of the latest Decree that is not allowing them to use the asset appraisals carried out on basis of the Oliver Wyman stress test.

On the other hand, negotiable and currently on sale sovereign debt portfolios which will benefit from forgiveness system on the part of the ECB (accumulated discount for a 10-year bond reaches 30%) might create a problem for the sector as only Bankia and CaixaBank dispose of portfolios at maturity that will not be examined. 

Pérez–Hernández reckons that none of the Spanish entities is going to fail the autumn test, unlike trading-centered markets of, e.g., Germany or Italy. He adds that he had never seen such a rigorous revision as the AQR will be conducted by 6.000 examinators on balances of 124 European banks (16 of them of Spanish roots).

Original article: Cinco Días (by Juande Portillo)
Translation: AURA REE

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