Goldmans: Property No Longer A Curse For Spain’s Banks

8 February 2017 – Expansión

A recovery in the real estate sector would be great news for the Spanish banking sector, following the disappointment it suffered recently in the courts as a result of the ruling that floor clauses must be applied retroactively. After years covering real estate risk, the entities may be benefitting from a change in trend and could end up having surplus provisions. BBVA and CaixaBank are the best positioned banks, according to a report from Goldman Sachs, which states that the “curse” phase of the property cycle is coming to a close and that we can now look forward to the next “blessing” phase.

A rapid recovery in the real estate sector would imply an overall provision surplus of €1,200 million for the banks. In a weak recovery scenario, the US investment bank limits the provisioning need to €800 million, after adjusting for impairment in 2016. Spain’s main banks had an exposure to the residential sector of €126,300 million at the end of 2015, of which €105,600 million corresponded to doubtful assets.

In the base case scenario, in which the recovery in the real estate sector is weaker than expected, the entity chaired by Francisco González would outperform the rest of the sector, with a provision surplus of €1,292 million.

Base case

Bankia, which would have a capital buffer of €518 million, would be the only other bank (alongside BBVA) that would not need to recognise more provisions against its property portfolio, even in the context of a slow down. Popular would be the hardest hit bank, according to Goldman Sachs, as it would need to recognise additional provisions of €404 million. The other major Spanish entities would need no more than €200 million to cover their real estate risk.

The Bank of Spain estimates that since 2011, the banks’ clean up efforts have eliminated more than 60% of the net exposure to the real estate sector from their individual balance sheets. Since 2008, they have recognised combined provisions amounting to approximately €300,000 million for live and foreclosed loans. (…).

Goldman Sachs estimates that the losses resulting from property would amount to €58,000 million in the worst case scenario, and the sector has already recognised provisions amounting to €47,000 million. The provision deficit would therefore amount to €11,000 million, although it would depend on the strength of the real estate recovery. In fact, the investment bank expects house prices to increase by between 4% and 6% in the short term. (…).

Both the Bank of Spain and the European Central Bank are urging banks to continue cleaning up their balance sheets to put an end to this legacy from the crisis. Despite reducing the impact on solvency levels, the investment bank thinks that Spain’s banks still have a significant and, for the most part, “problematic”, exposure. Net foreclosed assets amounted to €40,200 million at the end of 2015.

Goldman Sachs estimates that Spain’s seven listed banks have covered 45% of the doubtful assets that they hold linked to real estate. By entity, Sabadell (36%) and Popular (37%) have the lowest coverage levels, whilst BBVA is the entity that has the most control over its real estate risk, with a 56% coverage ratio.

Original story: Expansión (by R. Sampedro)

Translation: Carmel Drake