Spain’s Banks Still Own €350,000M Of Toxic Assets

26 September 2016 – Expansión

Spain’s banks still have €350,000 million of problem assets on their balance sheets, which they must get rid of if they want to tackle another major problem that they are now facing: their lack of profitability. Most of them have already strengthened their capital to comply with the regulatory obligations demanded by the European Central Bank (ECB).

However, according to data compiled by the ratings agency Moody’s, based on statistics from the European Banking Authority and the Bank of Spain, the burst of the real estate bubble in 2008 and the subsequent financial crisis have left non-performing loans, properties and deferred loans, with a total value equivalent to one third of Spain’s GDP, on the entities’ balance sheets.

Approximately €140,000 million of the total €350,000 million accumulated on the balance sheets of the entities corresponds to non-performing loans or NPLs, whilst the rest is divided between assets such as property developments and land owned by the banks and loans whose recovery has been postponed because the borrowers have not been able to afford the repayments.

As a whole, this burden is reducing the banks’ ability to handle their other great problem: monetary policy at zero-interest rates. Between January and June 2016, the revenues of the banks listed on the stock market which decreased by 1.3%.

In order to resolve this problem, the large entities are having to resort to the market to get rid of their bad loans, albeit with average discounts of 30% on their original values. Various alternatives are being explored to this end, including the structure being prepared by entities such as Banco Popular, which will debut a subsidiary on the stock exchange containing up to €6,000 million of toxic assets. Other entities are packaging up and selling loans and properties to funds that specialise in their management. According to the consultancy firm Deloitte, Spain’s financial entities currently have problem assets worth €20,000 million up for sale.

The analysts at Moody’s consider that the rate of reduction in the non-performing loan balances of Spanish banks is clear for all to see. “But it is not as visible in terms of the volume of foreclosed properties or deferred loans, which are still classified as performing”, explain María Cabanyes and Alberto Postigo, analysts at the ratings agency. They consider that it is essential that these latter loan categories be included within the “problem” loan balance so as not to hide any of the risks.

Moody’s, which estimates that Spain’s banks have deferred loans amounting to around €100,000 million, highlights that on the basis of the transparency exercises performed by the European Banking Authority, Spain is one of the banking systems that is most exposed to the problems of toxic assets. (…).

For this reason, from 1 October 2016, a new calculation method for recognising provisions against these assets will come into force, imposed by the Bank of Spain. (…).

Original story: Expansión (by Daniel Viaña)

Translation: Carmel Drake