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S&P: Banks Will Sell Off €35,000M In Toxic Assets In 2017

25 January 2017 – Cinco Días

S&P Global Ratings is convinced that there is going to be a new wave of M&A activity in the Spanish financial sector, as a result of the low return environment, which is putting downwards pressure on banks’ margins, and the rising regulatory costs.

The high volume of non-productive assets on the balance sheets of most entities is also having a negative impact on their accounts, which is pushing them towards mergers, said the Director General of Financial Institutions at S&P, Jesús Martínez, yesterday. The Director considers that these consolidation processes will help smaller entities improve their returns.

The Bank of Spain and most of the major financial institutions in Spain share this idea and are convinced that there will be a second round of mergers over the medium term. These mergers will join the one that Bankia and BMN are likely to complete in July.

In its forecasts for the year ahead, the ratings agency considers that the Spanish financial sector will be supported by the “robust” economic recovery that is happening in Spain at the moment, as well as by the improvements that are being seen in employment and in the real estate sector. It believes that the latter is key for the improvement of banks’ yields. In fact, it thinks that the banks will manage to considerably reduce the property they hold on their balance sheets this year, decreasing the balance from €183,000 million at the end of 2016 to around €148,000 in 2017.

This is the first time that the foreclosed asset balance will fall below its 2010 level (€175,000 million), according to data provided by S&P.

Non-productive assets in the Spanish banking sector peaked at €320,000 million in 2012 if we take into account the foreclosed assets that were transferred to Sareb by the nationalised bank. In 2016, the volume of foreclosed assets decreased by around €37,000 million, according to S&P. Between 2016 and 2017, the total decrease is expected to amount to around €70,000 million.

Nevertheless, the ratings agency warns that the sector will be affected by certain risks resulting from the crisis, such as the high volume of non-productive assets that the entities hold on their balance sheets, or the difficulties involved in increasing returns given the very low interest rates that are putting pressure on margins in the income statement.

Despite that, the agency considers that the banks may continue to offset this decrease in returns and the pressure on margins through the lower provisions that they are having to make, as a result of the reduction in non-productive assets, which is expected to continue over the next few years. S&P forecasts that the risk outlook for the financial sector will decrease, which will cause it to review its ratings. (…).

Original story: Cinco Días (by Ángeles Gonzalo Alconada)

Translation: Carmel Drake