3 March 2015 – El País
In 2014, loans to property developers and the overall volume of unpaid debt held by the top 7 banks decreased significantly, whereas the number of homes and plots of land they held increased.
Spain’s real estate bubble was largely a credit bubble. The excess amounts committed during the boom years subsequently gave way to a severe economic and financial crisis that forced Spain to ask its European partners to come to the rescue, to clean up the majority of its savings banks. The large banks were not immune from these excesses, but their higher levels of diversification, their capacity to attract private capital and their more professional management limited the damage (they suffered). All of this meant that even the healthy entities have had to undertake long and expensive clean up processes, which are still on-going for the most part. As part of this process, Spain’s listed banks managed to reduce their overall volume of problem real estate assets for the first time in 2014, according to data from their recently published annual reports.
The seven banks that form part of the IBEX 35 index (Santander, BBVA, CaixaBank, Bankia, Sabadell, Popular and Bankinter) closed last year with non-performing and substandard loans to property developers and unpaid homes, plots of land and other real estate assets amounting to €125,000 million. That balance represented a reduction of €7,000 million compared with the previous year. These are gross figures. If we look at the volume of provisions, the volume of as yet uncovered toxic risk decreased to just under €65,000 million, having decreased by €4,000 million in one year.
Overall, the reduction in toxic assets was exclusively driven by loans, since the real estate assets held by the banks (homes, developments, plots of land and shares held in real estate companies) continued to increase despite the fact that the entities have also been stepping on the accelerator in terms of sales. The banks are still seizing, foreclosing and receiving deeds in lieu of payment, for more properties than they are managing to sell.
A large proportion of the debt from the bubble is completing its cycle in this way. The banks have increasingly less exposure in terms of loans to property developers; the amount held by these seven entities decreased from €85,179 million to €68,086 million during the year. Furthermore, the volume of loans to property developers classified as normal, or up to date, also decreased. Now, only €18,000 million of these loans are considered as healthy, i.e. a quarter of the total. A large proportion of the loans went from being healthy to substandard or non-performing. And from there, to being written off (when loans are removed from the balance sheet and 100% of the losses arising from non-payment are provisioned) or to being classified as foreclosed properties (due to the foreclosure of the property or the handing over of deeds in lieu of payment). In 2013, only the volume of healthy loans decreased; doubtful and foreclosed debt increased, i.e. the volume of toxic assets grew. In 2014, the volume of non-performing loans decreased so significantly that, although the number of properties increased, the overall volume of “potentially problematic” real estate assets (as defined by the Bank of Spain) decreased for the first time. Until now, the only reduction in toxic assets (or rather transfer) happened when the banks transferred much of their developer exposure to Sareb, the bad bank.
In terms of properties, the largest increase related to plots of land, the asset that it is hardest to market. The banks have made provisions against almost 60% of the original value (of the plots of land they hold), but some plots have lost even more of their value and the entities are still reluctant to sell at a loss. There is barely any demand, transactions are relatively scarce and the banks are still seizing land from property developers unable to repay their loans. Thus, the volume of land in the hands of the seven IBEX 35 banks closed 2014 at a record high of €28,127 million, up €2,500 million compared with the end of 2013. Given the difficulties the banks are facing to find developers to purchase this land for construction, they are starting to adopt formulas that allow them to share the risk with the developers in exchange for providing the land.
The number of homes coming from from unpaid mortgages is also increasing. Specifically, the volume increased by €1,000 million last year, to €14,161 million. In this case, the increase was largely due to a delay in foreclosures. Procedures to seize homes that began at the height of the crisis are only now reaching their conclusion, even though the mortgage default rate seems to have already hit its peak.
The picture is also very different between the entities. Bankinter holds the badge of honour; it was the only one of the seven entities that avoided the temptation of the housing bubble. Its exposure to the sector was extremely low and it has hardly any doubtful debts or foreclosed properties. Next in line is Bankia, although in this case, the clean up of its balance sheet is less impressive: since it was achieved through the transfer of the bulk of its toxic assets to Sareb and the acceleration of the provisions against those assets that remained on its balance sheet.
Of the major banks, the entity that has done the most to clean up its real estate exposure is Santander. Its toxic property assets now account for only 15.3% of its lending to the private sector in Spain and just 1.5% of its consolidated assets. One step below are CaixaBank and BBVA. The entity chaired by Isidro Fainé has the highest level of provisions and the bank led by Francisco González benefits greatly from the international diversification of its business.
Sabadell is a special case. It appears to have high exposure to toxic assets, but a significant portion is covered through an asset protection scheme (that it acquired) when it purchased CAM. The entity with the most work left to do on the clean up front is Popular. Even though it has boosted the sales of homes, it has the highest volume of toxic assets and the lowest level of coverage of any of the seven entities.
Original story: El País
Translation: Carmel Drake
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