Spanish banks face fresh hit from bad loans

Spanish banks are bracing themselves for a fresh financial hit, amid rising pressure from the Bank of Spain on lenders to write down the value of their €200bn portfolio of restructured loans to the country’s troubled companies and struggling households.

The move is likely to trigger a further rise in bad loan ratios across the system and reduce earnings at a time when most Spanish banks are already suffering from low profitability. Analysts believe the crackdown could also shine a harsh new light on the capital position of some of the weaker banks, forcing them to sell assets to avoid the need to raise fresh capital.

The move reflects concern among Spanish regulators that banks are still shying away from admitting the full extent of the damage inflicted on their loan books by Spain’s long-running economic crisis.

There is a particular worry that Spanish banks have sought to avoid losses by agreeing to refinance loans to struggling companies, even in cases where borrowers are unlikely to repay their debt – a practice known in banking circles as “extend and pretend” or “delay and pray”.

According to official data, Spanish banks have refinanced close to 14 per cent of their total loan book, or €208.2bn. However, lenders continue to treat more than 40 per cent of all restructured loans as if they were performing normally, which means they avoid taking provisions against potential future losses.

“Some of the clients that have been restructured will eventually be able to pay back their debts. In many other cases the proverbial can has just been kicked down the road and we believe that banks will need significantly higher provisions to deal with restructured loans,” said Santiago López, a Madrid-based bank analyst at Exane BNP Paribas.

Spain’s central bank has now given lenders such as Banco Santander and BBVA until the end of September to comb through their books and re-classify all restructured loans according to a new set of tougher guidelines. Under the new regime, all such debt will in principle have to be treated as “sub-standard”, unless the loan meets a special set of criteria. It also tightens the criteria for loans currently treated as sub-standard instead of non-performing.

In both cases, the re-classification would force banks to take fresh provisions. Both the Bank of Spain and the lenders themselves say it is too early to say how big a hit the sector is likely to take, but calculations made by bank analysts suggest it will be substantial.

“All banks will have to increase their restructured loan coverage levels and the impact could be significant, meaning that profitability of Spanish banks will continue to be under pressure,” Daragh Quinn, bank analyst at Nomura, said in a research note.