Tag: coverage

Possible Postponement Of BdE’s New Provisioning Circular

1 March 2016 – Expansión

The entry into force of the new provisioning circular being prepared by the Bank of Spain, which is scheduled for 30 June, may have to be delayed. Spanish financial entities have been sending their comments about the circular to the regulator since January 22. The circular represents a modification to existing accounting standards regarding provisions, in light of the entry into force of the international standard IFRS 9, which will take effect from 2018.

“We think that the Bank of Spain will accept the postponement of the entry into force (of this new circular), until at least September”, explained a senior manager at one unlisted bank. One of the main difficulties involved with fulfilling the initially-planned timeframe is that “significant software development is required for the application of the new standard”. Sources at another three listed banks share this opinion.

The sector expects minimal impact from the entry into force of the circular. The Bank of Spain estimates that the provision level for the sector as a whole will not change much, according to one source. But some entities may need to significantly increase their provisioning levels, depending on what their portfolios are like. “With this circular – an intermediate step, ahead of the introduction of IFRS 9 – the Bank of Spain is preventing entities from leaving the adjustments required by the new standard until the last minute”, according to the Finance Director of one bank. We expect the coverage requirements to be tightened, especially for consumer credit and foreclosed assets.

The entities are worried because it will be mandatory for them to update the appraisals of their loan guarantees, which may affect the loan to value ratios of some mortgage loans, and therefore the provisioning requirement, depending on the age of each portfolio. The new standard will require the elimination of the ‘substandard’ credit category, which exists only in Spain, and the creation of categories of loans that will have to be provisioned because they display certain characteristics, beyond the individual circumstances of each one.

Original story: Expansión (by Michela Romani)

Translation: Carmel Drake

Gov’t To Modify Legislation For Home Buyers’ Insurance

12 May 2015 – Expansión

The Government is going to modify the insurance (legislation) that covers payments made by house buyers against possible breaches by property developers.

The Popular Party has presented an amendment in Congress to the Law for the Regulation and Supervision of Insurance Companies to modify its coverage, which (to date) “has not been sufficient to address the deficiencies that prevent effective protection for buyers, including advanced payments for these purchases”, says the justification for the amendment, signed by the PP.

The governing legislation requires that property developers take out collective insurance policies, through insurance bonds, and then subsequently sign individual policies with (house) purchasers.

But in practice, these second policies are not being signed and the coverage for buyers is not working. Several changes are being introduced “to eliminate this false appearance of insurance”, including the requirement to deposit advanced payments in a special account managed by credit institutions, where the funds may only be allocated to the property developer concerned.

The Law for the Regulation and Supervision of Insurance has completed the first stage of the parliamentary process and has now moved onto the Senate. This law transfers EU legislation (Solvency II) into Spanish legislation and is expected to come into force on 1 January 2016.

Original story: Expansión (by E. del Pozo)

Translation: Carmel Drake

Caixabank Will Need 6 Years To ‘Digest’ Its Toxic Assets

2 February 2015 – Voz Pópuli

Caixabank’s real estate arm generated losses of €1,148 million in 2014. The volume of foreclosed assets increased to €6,719 million, above the figure in 2013. The entity did improve its coverage levels. However, profitability barely reached 2.7%.

Caixabank’s surfeit of toxic assets peaked at close to €30,000 million. It managed to trim that down to €20,110 million by the end of 2014. However, progress continues to be slow. The entity forecasts that its balance of doubtful real estate assets generated during the real estate boom will not be fully run down for another six years, if the current pace of asset sales is maintained.

The entity chaired by Isidro Fainé marketed 23,400 properties for rental and sale in 2014, which resulted in turnover of €2,512 million (i.e. a 15% increase for rentals and a 28% increase for sales). If we add the properties marketed by developers that are financed by Caixabank, these figures increase to 35,870 properties and turnover of €5,432 million. However, this intense activity generated losses of €1,148 million for the real estate division, a business that has a delinquency rate of 58.7%. The entity’s overall delinquency rate is 9.7%, having dropped down from double-digit levels last year.

Caixabank succeeded in reducing its default rate by two percentage points during the course of the year, to 9.7%. This reduction was made possible by the fact that the decrease in doubtful debts was greater than the contraction in new credits, which dropped by 4.8% during the year. Even so, the bank led by Gonzalo Gortázar emphasised the changing trend observed in the last quarter of the year, and the fact that its credit balance rose by 1.4% compared with the same period in 2013. Nevertheless, it does not expect credit balances to grow in the sector in 2015.

A two-phase approach for getting rid of toxic assets

Caixabank’s exit from this stock of toxic assets (€20,110 million) will take place in two stages. Over the next two years, its real estate business will continue to make significant losses, which will weigh down on Caixabank’s income statement, explains its CEO, Gonzalo Gortázar. The largest impact on the balance sheet will take place in 2017 when the doubtful properties become foreclosed assets. “On average, it takes 4 years to sell a foreclosed property”, explained Gortázar.

As at 2014 year-end, Caixabank had €6,719 million foreclosed assets, a little over €650 million more than at the end of 2013. This increase is explained in part by the decrease in doubtful assets. The Catalan entity recorded four consecutive quarters of declining doubtful assets. These foreclosed assets had a coverage ratio of 55%, 140 basis points more than at the end of 2013.

In terms of solvency, Caixabank closed 2014 with a core capital ratio of 13.1% (measured in accordance with the Basel III framework), an increase of 128 basis points on the previous year. The fully loaded ratio, with all the deductions that will apply in the near future until 2019, was 12.3%. Nevertheless, these good results contrast against an excessively low level of profitability. Caixabank’s ROE stood at 2.7% at the end of December, a long way off of the ratios recorded by other entities, such as Bankia, which recorded a ratio of 8.4% at the end of September.

Indeed, the quest for profitability will be one of the main priorities of the strategic plan that the entity will present in London on 3 March. The market is now expecting entities to record double-digit ROEs.

Original story: Voz Pópuli (by Miguel Alba)

Translation: Carmel Drake