25 January 2016 – Expansión
Accounting Circular / The “bad bank” is going to recognise losses amounting to almost €2,000 million on its credits and loans in its 2015 accounts.
The banks accept that their investments in Sareb have been a fiasco, but to protect their income statements in 2015, they have decided to make provisions for just 15% of their exposures, in line with the proportion recommended by their auditors. Nevertheless, some of the banks calculate that, in a best case scenario, they will actually have to write off half of their investments.
Sareb is trying to redefine its proposed business plan in the face of the new accounting obligations imposed by the circular prepared by the Bank of Spain (last year), which is forcing the bad bank to revalue all of its assets, at market prices, before the end of this year.
Although the field work has not yet been completed, sources close to the company acknowledge that the new valuations will significantly affect its provisioning requirement and, as a result, the company will generate sizeable losses in 2015, which will force it to reduce its share capital of €1,200 million, to almost zero, and to convert some of its subordinated debt, €3,600 million in total, into share capital to restore the company’s equity balance.
Initially, Sareb estimated that the new accounting circular may force it to make provisions amounting to more than €500 million, which would have meant recognising losses in 2015, given that fewer assets were also sold last year, but as the process to value the assets on its balance sheet has progressed, that figure has increased to such an extent that certain shareholders now expect that “the provisions required against its non-property assets will amount to almost €2,000 million”.
Sources at the bad bank indicate that the additional provisions are due, above all, to the accounting requirements imposed by the Bank of Spain and have little to do with the actual deterioration of the company’s balance sheet. The reason is that the accounting circular does not allow Sareb to offset actual losses against unrealised gains, unless those gains are generated by the same type of asset as the losses. “And therein lies the problem”, according to sources close to the company, given that it seems that whilst the losses on the bank’s non-property assets (credits and loans) may amount to as much as €2,000 million, the valuation of its real estate portfolio is likely to generate gains of almost €1,500 million. The losses must be registered in the income statement, but the gains may only be recognised when they actually materialise.
These figures, which will be finalised at Sareb’s board meeting in February or March, when the entity’s accounts for 2015 and business plan to 2027 are approved, are the ones that have forced Sareb’s shareholders (the FROB with a 45% stake, the banks, except BBVA, which did not want to participate, several insurance companies and one real estate firm) to make provisions to cover their exposures and reflect the losses in their results for 2015. The main point is that the effort that the banks have made (Bankinter has already revealed its provisions when it presented its results, and the other banks will do so as and when they publish their accounts) is limited to providing against 15% of their total risk, capital and subordinated debt, when at least some of the banks admit, in reality, that “in the best case scenario, we are going to have to recognise losses equivalent to half of our investments”. (…).
It seems that the entities have agreed with their auditors to make limited provisions in 2015 in the knowledge that they will have to make further provisions against their exposures to Sareb during 2016.
Original story: Expansión (by Salvador Arancibia)
Translation: Carmel Drake