Tag: floor clauses

Fitch: House Prices Are Going to Rise At A Faster Rate Than Salaries

20 February 2017 – El Economista

On Thursday, the ratings agency Fitch warned that access to housing in Spain is going to gradually worsen as a result of the difficulties facing the labour market.

In its report about the outlook for the real estate and mortgage market in 2017, the ratings agency forecasts that house prices in Spain are going to rise at a faster rate than salaries, which means that the accessibility of housing is going to deteriorate.

“Fitch expects the accessibility of housing to gradually worsen given that any recovery in salaries will be lower than the increase in house prices, taking into account the challenges facing the labour market”, said the agency, which added that access to the real estate market will be “especially difficult” for first-time buyers.

Fitch expects the positive trend observed in house prices, which rose by 4% during the third quarter of 2016, to continue thanks to “robust economic growth”, the maturity of the mortgage market and foreign demand, which currently accounts for 13% of transactions.

Nevertheless, it says that the two-speed market will continue, given that the “bulk” of the recovery will focus on homes whose quality and location place them above average.

Slow down due to floor clauses

On the other hand, Fitch thinks that the legal uncertainties surrounding the floor clauses and the reform of the mortgage market will slow down the growth experienced since 2014 for the granting of loans to buy homes.

“The rate of growth in loans will slow down from the levels seen in 2015 and during the first half of 2016, given that Spain’s banks will adopt a more cautious approach in the face of the legal uncertainties that are affecting the mortgage market”, said the agency.

Nevertheless, it considers that the rise in house prices and the favourable loan environment, thanks to low interest rates, are still offsetting the repayment of loans in progress.

Finally, Fitch thinks that Spain’s banks will continue to reduce their exposure to toxic assets by divesting their non-strategic businesses, such as their non-performing loans and foreclosed properties.

Original story: El Economista

Translation: Carmel Drake

Saracho Calls Time On Ron’s Plans For Popular’s Bad Bank

15 February 2017 – El Economista

Project Sunrise, designed by Ángel Ron’s team at Popular to extract €6,000 million worth of real estate assets from the entity’s balance sheet, has run aground. With less than a week to go before Emilio Saracho (pictured above) takes over the presidency, the former global vice-president of JP Morgan has announced that he is not convinced by the plan and has put a stop to it, according to sources.

The vehicle had been approved by the Bank of Spain, but had not yet convinced the Spanish National Securities and Exchange Commission (CNMV) or the European Central Bank (ECB). Their aversion to the plan seems to have led Saracho to reject it. Although the star plan to clean up the balance sheet had received support from the bank’s Board of Directors, the difficulties involved in deconsolidating the portfolio of non-performing assets and the potential risks that could result for the future owners of the vehicle, are hampering its execution. (…).

Moreover, the real estate company has also been impeded by a more limited appetite than it had hoped for from the investment banks, whose involvement is key. The plan is for the company to be financed through senior bonds, subscribed to by those investors and subordinated debt, which will constitute the remuneration that the bank will receive from the company in the future. At the time, the entity confirmed that the interest expressed by JP Morgan, Morgan Stanley and Deutsche Bank was sufficient to crystallise the project. But, in order to deconsolidate the real estate company, the senior bond tranche must represent a majority and a low uptake from the investment banks is likely to increase the cost of that bond issue.

Ron acknowledged in his public farewell, alongside the CEO, Pedro Larena, that Project Sunrise has suffered certain changes from its original scope, but that Saracho was aware of these, along with other measures.

During the last quarter of 2016, the entity recognised an additional €3,000 million in non-performing assets and allocated €5,692 million to clean up efforts, rather than €4,700 million, the amount it had planned to set aside when it carried out its €2,500 million capital increase last summer. The effort reflects that recognition of a greater volume of toxic assets and also served to cover the costs of the adjustments to branches and staff, the impact of the floor clauses and the unexpected losses in TargoBank (…). Nevertheless, it was insufficient to reach the goal in terms of doubtful debt coverage and provisions for properties.

Shock therapy

Saracho was reportedly aware of all of this. Nevertheless, the banker will start work without a pre-determined road map (…) on the understanding that the bank needs to define a comprehensive shock plan.

Saracho will conduct a detailed analysis to assess the entity’s viability and to define its new strategy. Ron was committed to making the bank smaller, focusing on its profitable business niche of SMEs in Spain and spinning off its subsidiaries in the USA, Mexico and Portugal, where the interest aroused will ensure a positive return on investment – market sources speculate that the private bank, and even the insurance business, are included in this equation.

The sources consulted also say that these changes, if they are undertaken, would help restore solvency, but would not be sufficient to ensure the bank’s future. After a detailed analysis of the situation, Saracho will have to choose the best option for his shareholders from a handful of scenarios.

If he thinks the entity is viable, it is unlikely that he will undertake another capital increase (…), but may include transferring assets to Socimis or integrating them into real estate companies in which the bank holds a stake.

In the worst case scenario, the new manager faces the option of breaking up the group and selling it off in parts or by asset. And whilst a sale to a competitor or a merger is not unthinkable, a priori, it appears to be the least attractive option for shareholders, given the lack of interest in the sector.

Original story: El Economista (by Eva Contreras and Lourdes Miyar)

Translation: Carmel Drake

Banks May End Up Paying Out Interest To Their Mortgage Customers

15 April 2015 – Expansión

In Europe, negative interest rates have created a problem that no bank would ever have imagined until now: they cannot rule out the possibility that they may end up having to pay out interest to customers that have mortgages linked to Euribor.

In countries such as Spain, Portugal and Italy, Euribor is the interbank interest rate that is used for (most) loans. Since the ECB introduced measures such as quantitative easing (QE) to boost the Eurozone’s economy, the index has fallen sharply and has even slipped into negative territory.

Given that the banks set interest rates on many of their loans at a small percentage above or below reference rates, such as Euribor, the fall in these interest rates means that some banks are now finding themselves in the difficult situation in which they are having to pay out interest to borrowers.

At least one bank, Bankinter, has started to pay its clients interest on their mortgages for those loans that are indexed to the Swiss franc, after the reference rate fell into negative territory.

According to a spokesman for Bankinter, in recent months, a negative interest rate has applied to the handful of mortgages linked to one-month Swiss franc Libor that the bank still has in its portfolio, since that Libor rate has dropped to a rate of -0.85%.

So far, European banks have been hoping that they will avoid the cost of having to pay out interest to their customers.

They have consulted with their (respective) central banks to find out how they should act in the event that the interest rates on their mortgages fall into negative territory. And so far, the response they have received has not been very reassuring.

The Portuguese central bank ruled recently that entities will have to pay interest to their customers if Euribor falls below zero, although the banks may “take appropriate action” regarding the terms (and conditions) they include in future loans. In Portugal, more than 90% of mortgages are linked to Euribor.

In Spain, a spokesman for the Bank of Spain said that this matter is currently being evaluated. The vast majority of Spanish mortgages are linked to 12-month Euribor, which currently amounts to 0.187%.

An executive from another Spanish bank said that in recent months his entity had started to include floor clauses in the loans linked to Euribor that it grants to companies.

In Italy, the banks are waiting for a response from the central bank, although in advance, they say that their mortgages do not contain any clauses to explain what happens if interest rates slide into negative territory.

Original story: Expansión (by P. Kowsmann and J. Neumann)

Translation: Carmel Drake