Madrid: Mounting bad loans, competition for funds and exposure to wobbly Portugal make Spain’s banks a potential liability as the country fights to avoid an Ireland-style bailout.
A burst property bubble also weighs on the sector, but the immediate worry is over the spring of next year when both the banks and the government will be in the market for a combined €50 billion ($66 billion) of funding.
“Problems may well arise when banks need to turn over debt at the same time as the government if confidence remains low,” said Javier Bernat, analyst at Caja Madrid.
A wave of consolidation and conservative rules have supported the banks so far, but after Ireland accepted an €85 billion aid package, investors are turning their eyes to Portugal and Spain.
In the larger economy, mid-size banks such as Banco Sabadell and Banco Pastor are seen as potentially the most vulnerable.
They were frozen out of European interbank markets earlier this year, and are not as diversified as global giants BBVA and Santander.
Capital requirements for Spanish banks have traditionally been more stringent than in other countries and the average core Tier 1 capital of the sector was 7.7% under a crisis scenario in July’s Europe-wide stress tests.
But the bar has been raised for all banks since then, as new capital rules have been agreed, leaving Spanish banks looking less well capitalised than many international rivals.
The weakest link in Spain’s banking system are regionally focused savings banks -- who had an average core Tier 1 capital ratio of only 5.5% in the stress tests. They have already gone through a forced consolidation process that has cost the government €15 billion in credit lines.
Shares in Santander, the euro zone’s biggest bank, sagged 3% to an 18-month low on Tuesday as worries about the sector grew.
Spain’s economy is larger than those of fellow euro zone peripheral countries Ireland, Greece and Portugal combined, and if it spirals into a debt crisis despite progress cutting its budget deficit, a bailout would strain the European Union’s safety net.
With the economy stagnant and spending cuts landing, market jitters over possible bank funding problems have pushed up financing costs for Spain to euro-zone lifetime highs of about 5.4% for 10-year sovereign bonds.
Another source of concern is heavy exposure to Portugal, which is seen as the next euro zone trouble spot. Spanish banks had a $108 billion exposure to Portugal at the end of March, according to Bank of International Settlements data.
Spain’s government faces a bond redemption at the end of April of €15.5 billion in competition with the banks, which are also looking to refinance around €35 billion , according to analysts at Barclays Capital.
“We are concerned that tapping the markets for more than €50 billion in March and April represents a substantial level of execution risk,” the analysts said in a note, adding the situation would worsen in 2012.
Banks also face mounting credit losses, aggravated by stubbornly high unemployment, which Barclays estimates could hit 200 billion euros over the next few years.
Spain’s central bank in September required banks to put aside more reserves to protect against losses and make further write downs on real estate they hold, but investors are concerned the system hasn’t been tested severely enough.
“A stringent, Spain specific bank stress test would allow for differentiation, accurate sizing of (savings banks) potential capital needs and would exert additional pressures towards restructuring,” Goldman Sachs analysts said. They estimated loan losses would hit €145 billion, varying greatly between large banks like Santander and mid-sized banks such as Sabadell and the privately held savings banks.
The central bank announced last week it would run a second round of stress tests in the Spring.
Many analysts expect another round of consolidation in the savings banks and further drawing on the government’s €90 billion restructuring fund.
Savings banks’ exposure to real estate and construction might require €56 billion of funding, Unicredit said.
“Assuming this €56 billion is needed in 2010 and adding on bonds maturing plus the funding of the deficit, then we calculate that Spain needs approximately €350 billion over the next three years,” the analysts said.
Spain’s banks are heavily reliant on funding from the European Central Bank. Financing needs dropped by a third last month from September in a sign banks are weaning themselves off the funding programme, but the banks still tapped the ECB for €71 billion.
Banks have turned to retail depositors to fill the gap left by erratic wholesale funding, but competition for savers has developed into a pricing war, leaving banks paying interest more than double the 1.85 percent offered on 12-month Spanish Treasury bonds.