The pulse of the Spanish financial sector has improved greatly in the last year, but it is necessary to continue the surveillance. This is what the International Monetary Fund, which presented its recommendations for the economy, believes. Its opinion is not trivial, as the Fund acts as the independent supervisor for the Eurogroup in the program of financial assistance to Spanish banks for 100.000 million Euros.
The institution presided over by Christine Lagarde considers that banks are “significantly more solid” but that “risks continue”, mainly with an economy that continues in recession. In order to fight these risks, it is necessary to protect the solvency of banks which was “so hard to attain” and incentive the credit.
James Daniel, chief of the mission of the IMF for Spain, demanded caution to the financial institutions. “They should reinforce the quality and quantity of capital and be very cautious in the distribution of dividends in cash”. The dividend is the part of the benefit that a company distributes to its shareholders.
The position of the Fund agrees with that of the governor of the Bank of Spain, Luis María Linde. He advised banks to distribute dividends with “rigour” in the last Annual Report of the supervisor, although his recommendation was more subtle than the one expressed yesterday by the IMF and without any explicit mention to which should be the best formula to remunerate the shareholder.
The IMF defends the limits on dividends in cash because banks are able to increase their own resources and reinforce the financial cushion needed to face a possible deterioration of the economy. This is the way to minimize the use of public resources in any crisis.
Most Spanish banks which have profits and therefore distribute dividends, are already close to the recommendations of the IMF. The institutions choose the formula of the scrip dividend that allows shareholders to choose between the payment in shares or in cash.
Nevertheless, the emission of new shares in order to distribute a dividend could affect the price of the shares and reduce the profit per share. In fact, Santander and BBVA, the two biggest banks in Spain are thinking of returning to the distribution exclusively in cash from next year on, a movement that will be followed closely by the supervisor.
Daniel also requested banks to continue cleaning their balance sheet and selling the problematic assets quickly. The institution praised the decision of the Bank of Spain of keeping an eye on the risk of the refinancing of credits. These allow banks to grant longer datelines to customers with temporary liquidity problems hoping they will recover their payment capacity on the medium term. Investment banks and analysts have pointed out that with this formula banks avoid non-payments, they delay default payments and the recognition of the related losses. The Bank of Spain will require new provisions for the refinancing which globally reach 208.206 million Euros, 13,6% of all the granted credits. The supervisor calculates that he will demand around 10.000 million Euros in provisions in two years.
The IMF reminded yesterday that the control on banks is indispensable. The solvency tests required by the European Union are not enough and therefore the Bank of Spain should carry out its own “rigorous and regular” tests, Daniel indicated. The last decision of the Spanish supervisor would fit in this policy, as he plans to revise the banking assets confidentially next fall. His objective is to check that Spanish institutions will be able to pass the next stress test that will be carried out once the banking supervision is taken on by the European Central Bank. Daniel pointed out that “perhaps” the tests of the Bank of Spain reveal that the institutions need more capital. (…)