Tag: non-performing assets

Santander To Receive Non-Binding Offers For Popular Portfolio This Week

24 July 2017 – Expansión

Santander is heading into the home stretch of its initiative to get rid of Popular’s toxic real estate assets. The process will be accelerated next week when the entity closes the first phase. According to financial sources, Santander is open to receiving non-binding offers until the end of July.

The bank wants to sell a portfolio of foreclosed assets and doubtful real estate loans from Popular for a gross amount of €30,000 million. Santander is planning to sell 51% of this portfolio to a single buyer. The real estate risk of the bank that was resolved by the European authorities amounts to almost €37,000 million, including the stakes in real estate companies, which amount to around €7,000 million.

On 7 June, on the same day that she announced the purchase, Ana Botín revealed a plan to cut Popular’s non-performing assets in half within 18 months. But the segregation of the portfolios of property into a single vehicle could shorten that period. The agency Reuters said on Friday that the bank expects to receive its first non-binding offers by today, Monday 24 July.

Sources in the market take it for granted that the interested parties bidding for Popular’s toxic real estate will include Apollo, Lone Star and Blackstone. Other sources say that one of those funds has already decided to withdraw and they do not rule out others joining, such as Cerberus. In the pools, Apollo and Lone Star are starting off as favourites.

Santander’s plan also involves selling the majority of the servicer Aliseda to the winner of the bid. That company is responsible for managing Popular’s real estate assets and is fully controlled by Santander, after the entity repurchased the 51% stake controlled by Kennedy Wilson and Värde Partners on 30 June 2017.

Aliseda

By also purchasing the servicer Aliseda, Apollo, for example, would achieve important synergies, say sources in the sector, given that the fund already controls 85% of Altamira, which manages Santander’s real estate assets. Meanwhile, Lone Star has strong a strong interest in Popular’s portfolio, which was put up for sale at the end of June, and has an aggressive plan for absorbing real estate assets in Spain. However, the fund controls 39.6% of the real estate company Neinor, a competitor of Metrovacesa, in which Santander and Popular together hold a 70% stake; which may go against it in the bidding.

The rapid sale of 51% of the portfolio of Popular’s toxic assets would allow Santander to deconsolidate the real estate weight from its balance sheet, one of the main factors that triggered the resolution of the until now sixth largest bank by asset volume. Popular’s real estate portfolio contains €10,500 million in land and hotels, plus more than 25,000 homes, according to the latest available data. Half of the properties are located in Andalucía and Valencia.

Santander has recognised provisions amounting to €7,900 million to increase the coverage ratio of Popular’s real estate to 69%. The average in the sector is 52%, which will allow it to offer significant discounts.

Market sources estimate that Santander may record revenues of almost €5,000 million from the sale of 51% of Popular’s real estate portfolio. The bank could also earn up to €630 million from selling some of Popular’s property, according to a recent report from Citi.

Original story: Expansión (by R. Sampedro and N. Sarriés)

Translation: Carmel Drake

Santander Owns 40% Of Spain’s Toxic Assets After Popular Purchase

12 June 2017 – El Confidencial

Banco Santander’s purchase of Banco Popular has created a new real estate headache for the entity chaired by Ana Patricia Botín (pictured above). As a result of the operation, which was closed for the symbolic price of €1, the Cantabrian entity has taken on a significant “inheritance” in the form of toxic assets linked to property. Specifically, we are talking about assets worth almost €17,000 million – €10,300 million net – according to data submitted by Banco Popular to Spain’s National Securities and Exchange Commission (CNMV) at the end of 2016.

If we add that figure to the €10,700 million that Santander already held on its balance sheet, according to figures at the end of last year, then the entity’s total real estate exposure following this corporate operation amounts to €27,700 million. That volume represents almost 40% of the entire toxic asset exposure that the large listed banks recognise on their balance sheets, which, at the end of 2016, amounted to €70,000 million in total (…).

Despite the clean up of foreclosed assets undertaken in recent years – carried out through the direct sale of properties and portfolios and the signing of operations such as the transfer of homes to Testa – the financial institutions still have a significant volume of property on their balance sheets. And Popular had the largest exposure of any of the listed entities. In net terms, it held €10,305 million; a figure well above those recorded by CaixaBank (€6,876 million); Sabadell (€6,244.7 million); BBVA (€6,012 million); Santander (€4,787.2 million); Bankia (€2,251.2 million) and Bankinter (€260.2 million).

Moreover, in land alone, the gross value of its assets amounts to almost €8,000 million, half of its total exposure to real estate and, once again, the highest figure of any of the listed banks.

Nevertheless, the precise gross value of those real estate assets has been one of the aspects that has generated most uncertainty in the market and one of the main obstacles it faced when it came to closing a corporate operation, which Santander agreed to in the end. An increase in the provisions against Popular’s real estate portfolio after the reappraisal process would increase the coverage ratio of these assets, which currently stands at 38.5%, however, it would also reduce their net book value, which amounted to €10,900 million as at 31 March.

Property continues to be a major problem for the financial institutions despite the clean-up undertaken in recent years. In fact, despite all of the real estate clean-up efforts, the G-7 banks reduced their global volume of foreclosed assets by just 2.3% in 2016; and by 0.73% in the case of land. (…).

The purchase of Banco Popular leaves the (recently announced) sale of a real estate portfolio amounting to €2,000 million up in the air – at least for the time bing – Emilio Saracho was preparing the portfolio together with KPMG, with the aim of reducing the high volume of non-performing assets (…) on its balance sheet in an accelerated way. (…).

Original story: El Confidencial (by E. Sanz)

Translation: Carmel Drake

Moody’s: Popular Cannot Afford To Wait To Clean Up Its BS

29 May 2017 – Expansión

The credit rating agency Moody’s considers that Banco Popular does not have time to wait for the recovery in the real estate sector in Spain to have a positive impact on the quality of the real estate assets in its portfolio.

In fact, the rating agency considers that Popular’s solvency problems mean that it must reduce the non-performing assets that are weighing down on its balance sheet in an “accelerated” way, without allowing the entity to fully benefit from the reactivation of the real estate market.

“The recovery in the real estate market is a positive factor for the banks that are most exposed to the real estate sector”, said María Viñuela, Deputy Vice-President and analyst at Moody’s.

Nevertheless, Viñuela understands that the recovery in the housing market will materialise “over time”, which is why she reiterates that Popular is “under pressure” to improve its solvency and accelerate the reduction of its non-performing assets within a “shorter” time frame.

The entity chaired by Emilio Saracho (pictured above), whose rating Moody’s downgraded to B1 in April, has non-performing assets amounting to €37,000 million – 25% of the total – on its balance sheet, most of which are related to the real estate sector, which is one of the major factors that impinges on its value in a possible corporate operation.

The bank, which is currently analysing all of the strategic options open to it, still has more than two weeks to decide whether to go ahead with the sales process in which it has been immersed since 16 May, given that a deadline of 10 June has been set for taking a decision.

For the time being, Popular has not received any specific firm offers, nor has it assumed any commitments, which means that it has not completely ruled out a capital increase, as Saracho stated during the most recent General Shareholders’ Meeting.

Amongst Popular’s strengths that may attract its buyers include its franchise and its SME business, where the entity is the leader of the sector, with a market share of almost 18%.

Original story: Expansión

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

Spain’s Banks Sold RE Assets For c.€5,000M In H1

8 August 2016 – Expansión

Spain’s banks are still working hard every day on the unenviable task of cleaning up the property on their balance sheets. And that was reflected in their reported sales figures for the first six months of 2016, which increased by 9% compared with 2015. In total, the major Spanish entities (which have now published their results) received proceeds amounting to €4,860 million from the sale of homes and other real estate assets during H1 2016.

This acceleration was also accompanied by another piece of good news for the banks, namely that the improvement in the real estate market is allowing the entities to record profits in many cases.

In terms of the number of real estate units, the figure remained stable during the first half of the year, with around 37,500 assets sold during the first six months, up by 0.9% compared to H1 2015. This reflects the fact that the banks completed the same number of operations, but at higher prices.

This acceleration in real estate sales comes at a time when the banks are concerned about the effect that the accounting changes applied by the Bank of Spain will have. It is hoped that the new legislation – which comes into force in October – will tighten the bolts on the provisions made by entities against foreclosed assets. In fact, some groups recorded large provisions during the first half of the year to reflect the possible impact.

Mismatch of provisions

According to several financial sources, there is a mismatch in the provisions recorded against many of the banks’ foreclosed assets. In this way, the two Royal Decrees proposed by (Luis) de Guidos in 2012 established linear provisions for all of the banks’ properties, but there are significant deviations for homes depending on the region and condition, which are not reflected in their valuations.

In addition, both the Bank of Spain and the European Central Bank (ECB) have indicated on several occasions that the entities have to decrease the weight of non-performing assets on their balance sheets, one of the major impediments against improving yields.

“If we add the doubtful asset balance to the foreclosed asset balance, we arrive at a figure of €213,000 as at December 2015 […]. Although those two numbers decreased by 14.5% in the last year, they still account for a significant percentage of the banks’ assets in Spain and they weigh down negatively on their accounts”, say the Bank of Spain.

Just like last year, Popular was again the entity that recorded the highest revenues from property sales, with 5,227 assets sold for just over €1,000 million. (…). Santander and Sabadell came in close behind Popular, with sales amounting to €994 million and €974 million, respectively. Nevertheless, it is worth mentioning that the figures provided by the entities are not homogenous, given that some include sales by property developers linked to banks as well as sales of other assets such as garages, storerooms, retail premises and land. (…).

CaixaBank was ranked in fourth place, with sales of €610 million. (…). BBVA and Liberbank were the entities that saw the highest increase in property sales. Sales by the former rose by 62% to €323 million and that figure increases to €529 million if we include the sales of assets from its property developers’ balance sheets.

Meanwhile, Liberbank increased its volume of property sales by five times to €89 million, after reconfiguring its real estate arm and assigning more resources to it.

The other entities – primarily groups created from the former savings banks – fall well behind in terms of sales volumes because their balance sheets are smaller, in part because they transferred assets to Sareb. (…).

Original story: Expansión (by J. Zuloaga)

Translation: Carmel Drake

BBVA Reorganises Its “Bad Bank” After Key Director Leaves

6 June 2016 – Expansión

BBVA has put a new spin on the organisation of its bad bank. The entity chaired by Francisco González recently announced the disappearance of its problem assets division – Non Performing Assets – after agreeing the departure of its main Director and dividing up its functions between two other divisions, according to financial sources.

The Spanish group already reconfigured the division just over two years ago. Then, it handed over the task of accelerating the sale of problem assets to Pedro Urresti (pictured above), the Director who has now just left the entity as part of the reorganisation.

Urresti joined BBVA in 2006 from JPMorgan, where he had been responsible for Capital Markets in Spain and Portugal. At BBVA, where he replaced Carlos Pertego – the current Director of Goldman Sachs – he led the Financial Management and Investor Relations department until 2011, when González put him in charge of problem assets.

Following the dissolution of that area and the departure of Urresti, BBVA has chosen to divide its functions and share them out between two divisions. On the one hand, everything relating to real estate assets will be transferred to BBVA Real Estate – the unit in which Anida sits – led by Agustín Vidal-Aragón. On the other hand, the activity relating to the sale of debt portfolios will be transferred to Javier Rodríguez Soler, the bank’s Director of Strategy and M&A.

Reinforcement

Rodríguez Soler was one of the Directors who’s profile increased following the reorganisation of the management team performed by González last year, when he appointed Carlos Torres as the new CEO, to replace Ángel Cano. The Head of M&A, who until then had reported to the Finance Director, Jaime Sáenz de Tejada, went on to lead his own division, reporting directly to the President.

As a result of the new changes, BBVA hopes to accelerate the sale of its real estate assets, whose balance barely decreased last year, due to the takeover of Catalunya Banc.

During the two and a half years that Urresti has been in charge of the problem assets division, BBVA has been one of the least active large Spanish entities in the sale of portfolios, and has barely transferred any portfolios of loans or homes.

Meanwhile, other financial groups such as CaixaBank, Sabadell and Bankia have taken advantage of the improvement in the market to sell €17,000 million worth of non-strategic assets.

Furthermore, the entity has not sought to make any alliances in the sector through the sale of part or all of its real estate arm, like other entities did, including Santander, CaixaBank, Bankia, Sabadell and Popular, amongst others. It did consider selling off its collections business and it appointed KPMG to coordinate that sale, but it ended up pulling out.

According to financial sources, this strategy means that the sales rate of its real estate assets is slower, but the bank would benefit in the event of a faster than expected economic recovery, as it would obtain more in return for its properties and real estate collateral. Nevertheless, the risk still exists that the opposite may happen.

Original story: Expansión (by Jorge Zuloaga)

Translation: Carmel Drake

RE Default Rates Closed 2015 At Lowest Levels Since Jun ’12

21 March 2016 – Expansión

There was a significant decrease in the default rate of both property developers and individual mortgage borrowers last year.

Defaulted payments by real estate developers…are diminishing. Last year, the default rate of this segment fell by almost nine percentage points, to close the year at 27.5%. That was the lowest level since June 2012, when the ratio stood at 27.4%.

Since the peak of 38% in December 2013, the ratio of doubtful real estate loans has reduced by almost 11 basis points, and the volume of non-performing assets has decreased by almost €47,800 million. This decrease is explained less by recoveries and more by the sale of (provisioned) non-performing loan portfolios to opportunistic funds, as well as the multi-million exchanges of debt for assets, which have decreased the default rate in exchange for filling the banks’ balance sheets with property.

Also, during Q4 2015, financing to property developers experienced a slow and steady decline, indicating the first signs of a slow down, decreasing by just half a percentage point since September. Nevertheless, it is worth noting that the property loan balance now stands at €135,190 million, well below the peak of €324,439 million it reached in 2009.

Improvements in mortgages

Another segment that registered some improvement in credit quality in 2015 was that of mortgages for the acquisition of homes by individuals. That default rate decreased by almost one percentage point, to close the year at 4.8%.

This decline occurred despite the fact that loans continued to decrease during the year, by 3.8%. Since the peaks of 2010, the total mortgage balance has decreased by €101,193 million to its current level of €531,256 million.

Stagnation in January

With respect to the general default rate in the sector, which stood at 10.1% at the end of 2015, having decreased by 2.5 p.p. during the year, the Bank of Spain released the data for the beginning of 2016 on Friday. In January, the decrease in the default ratio came to a halt and the default rate stagnated.

During the month, the total loan balance decreased by €8,472 million, whilst the doubtful asset balance decreased by €903 million.

Original story: Expansión (by M. Romani)

Translation: Carmel Drake

Losses From The Banks’ RE Arms Rose By 11% To €3,266M

14 March 2016 – El Economista

The banks’ real estate arms are still weighing down on the accounts in the sector. Despite the economic recovery and the improvement in prices, the property development companies owned by the financial entities recorded more losses last year than in 2014. Specifically, according to the available data, their combined losses increased by 11% to €3,266 million.

The reasons for this deterioration are the facts that: the volume of assets on their balance sheets is still growing, which means higher provisions, and that divestments are being made at prices that do not even cover management costs and taxes.

Homes and land are still moving onto the balance sheets of the banks at a high rate. In this way, the largest groups (Santander, BBVA, Bankia, CaixaBank, Sabadell and Popular) increased the volume of homes and land they own by 8% in 2015 to €62,163 million, before provisions and valuation adjustments.

In this context, the main owners of these assets are suffering from huge losses and are not forecasting to make any profits until 2017, at least. Everything will depend on the evolution of the economy over the next few months and the recovery of both real estate transactions and prices. In 2015, for the first time since the crisis began, house prices rose.

The real estate company that recorded the highest losses was the property arm of CaixaBank, which is one of the largest. BuildingCenter generated negative results of €1,427 million in 2015, which represented an increase of 11.4% compared with 2014. In the middle of last year, CaixaBank had to inject €1,600 million into its subsidiary to restore its equity. (…).

Although the property developer owned by the Catalan group suffered the greatest losses, the two main property developers owned by Ibercaja saw the highest rises  in their losses. Cerro Murillo and Inmuebles CAI’s losses shot up by 212%, due to the poor performance of the latter, which was inherited from the former Caja3. The losses of both companies amounted to €203 million in total. Ibercaja is trying to accelerate its sales and improve the administration of its real estate assets….to this end, it has sold its home and land management platform to Aktua, in an operation that will generate profits of €70 million for the entity.

Ibercaja was one of the few entities that had not sold its platform. BBVA and Sabadell are the only others that have not sold theirs yet either; they are retaining this administration in-house for the time being.

In fact, BBVA was one of two entities that managed to reduce the losses generated by its real estate arm. The two companies that own its homes and land, which operate under the name Anida, decreased their losses by 22.2%, to €658 million. In part that was due to the fact that the group, chaired by Francisco González managed to sell some of its assets with gains. (…).

The other developer that managed to reduce its losses last year was Liberbank, but its situation is different from those facing other players in the majority of the sector, given that the entity transferred the bulk of its assets to Sareb as part of the financial rescue plan and the properties it inherited from the former CCM are covered by the Deposits Guarantee Fund, up to a maximum of €2,475 million.

Some entities have tried to sell sizeable batches of properties, but these projects have been suspended or delayed due to the political uncertainty in Spain following the general elections and due to the instability in the market due to the slow down in China and the fall in the oil prices.

In this context, the banks will intensify house sales through their branches to individual buyers. One of the most ambitious projects has been proposed by Popular, which seeks to sell homes worth more than €2,800 million in 2016, as part of a plan to get rid of up to €8,000 million non-performing assets, through various means, to improve profitability.

Popular’s real estate arm, Aliseda, increased its losses by 13% in 2015, to €165 million. (…).

Original story: El Economista (by Fernando Tadeo)

Translation: Carmel Drake

Blackstone Buys 4,500 Rental Homes From Sabadell

13 January 2016 – Expansión

Blackstone has won one of the largest ever real estate auctions and it did so during the final days of 2015. A few weeks ago, the US fund completed the acquisition of 4,500 rental homes from Banco Sabadell, according to financial sources consulted by Expansión.

This represents the largest block sale of homes by a Spanish bank in recent years, given that the sale is still pending of two larger portfolios that Bankia and Ibercaja have put on the market.

The latest operation, which forms part of Project Empire, has now been signed by both parties; a few conditions precedent are still outstanding, but they are expected to be resolved within the next few weeks. Given that the agreement was actually reached in 2015, it will be accounted for within last year’s results, which Banco Sabadell will announce on 29 January.

The portfolio was initially valued at around €600 million, however, after it was first put on the market, the number of flats included in the portfolio decreased from 5,000 to 4,500 (bringing the valuation down to €540 million). The interested funds had been demanding discounts of between 40% and 70% for banks’ portfolios of homes, on the basis of the quality of the assets. In the case of Project Empire, since the homes in the portfolio are all rented out, the price obtained by Sabadell could have been higher, given that Blackstone will obtain regular rental income, as well as taking ownership of the assets.

Firm commitment

This purchase strengthens the US fund’s position in Spain, whose senior advisor is Claudio Boada. The homes will be managed by Blackstone’s real estate subsidiary, Anticipa, the entity formerly known as CatalunyaCaixa Inmobiliaria, led by Eduard Mendiluce. In addition, the fund has three other subsidiaries in Spain, which also manage property investments, namely: Fidere, which focuses on homes for rent (many of which are social housing properties); Logicor, which concentrates on the logistics asset segment; and Multi Development, which specialises in shopping centres.

Blackstone completed its largest ever investment in Spain last year, with the purchase of 40,000 mortgages from Catalunya Banc, worth €6,400 million for €3,600 million. Anticipa manages that portfolio, together with a few others acquired from entities such as CaixaBank, taking the entity’s total assets under management to €10,000 million.

Another one of the most active investors in Spain in recent months has been Oaktree, which competed against Blackstone to take over Sabadell’s portfolio.

For the Catalan entity, this operation allows it to continue improving the quality of its balance sheet through the sale of non-performing assets. Sabadell has reduced the volume of problem assets on its balance sheet by €3,500 million since the start of 2014 ,to €22,350 million at the end of September 2015.

In addition to Project Empire, Sabadell sold other portfolios last year to investors such as Pimco, Aiqon and Sankaty. Altogether, it transferred assets worth €2,400 million to those funds in 2015.

Original story: Expansión (by J. Zuloaga/S. Saborit)

Translation: Carmel Drake

Banking Sector: RE Hangover Continues To Undermine ROE

28 October 2015 – Cinco Días

How to improve profitability has become the great challenge for the Spanish real estate sector now that the chapter involving the clean up of toxic assets from the banks’ balance sheets is coming to an end. The (sector’s) return on equity (ROE) has decreased by 6.8 basis points over the last six years, to 5.3% at the end of 2014, mainly due to the higher capital requirements demanded as a result of the clean-up process. But the current low yields, which will never return to their pre-crisis levels, are due not only to the near-zero interest rates, which are slashing margins, or to the scarce flow of credit. The real estate hangover from the long financial restructuring process is also weighing down heavily on the ROE.

According to AFI’s calculations, the sector has accumulated non-performing assets amounting to €238,000 million – including doubtful loans and foreclosed assets – which are generating zero yields and are consuming capital and provisions. In short, they could be reducing the sector’s annual profitability by up to 5.4 percentage points.

AFI says that some of these assets are actually generating negative returns, due to the management and maintenance costs associated with them. And the company calculates that if they were sold at their net book values – even ignoring the fact that some assets may be accounted for at higher than market value – and the liquidity obtained was reinvested in loans to households and companies, then “the sector could achieve an average annual return of 3% and moreover, it would save the provisions associated with those assets, which we estimate represent 10% of their net book value”. AFI added that this saving would result in around €13,000 million, a result that would finally release the burden of these assets, which still represent 8.8% of the sector’s balance sheet.

Modest expectations

The firm emphasises that “in order to improve returns, we need to accelerate the digestion of these unproductive assets”. However, its estimation of the improvement in Spanish banks’ ROE in the coming years does not exceed 6% or 7%.

AFI also points out that the decrease in the ROE in recent years has not been greater mainly thanks to the ECB, whose policy has allowed financing costs to be lowered and high capital gains to be generated on fixed income portfolios. Even so, it warns that the carry trade profits on these portfolios are not going to be repeated and it adds that unrealised gains on fixed income portfolios have decreased by more than 50% in 2015, due to the sales that have already been made and the valuation at market prices. “Therefore, the sector now needs to look for recurrent sources of profitability”.

Original story: Cinco Días (by Nuría Salobral)

Translation: Carmel Drake