Spanish banks fear new capital hit in European review

Sun Oct 13, 2013 9:22am EDT
 
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By Jesús Aguado

MADRID (Reuters) - Spanish banks are considering ways to boost their capital amid fears the euro zone's imminent review of their balance sheets will force them to set aside even more cash for potential losses on restructured loans, banking sources in Madrid said.

The country's banks last year made steep provisions for average losses of up to 60 percent on property lending where payment problems have already meant they are classed as bad loans. They may now face scrutiny over the coverage levels for defaults in other parts of their books, the sources said.

In particular, Spanish banks' provisions to cover refinanced loans are likely to be examined, after the Bank of Spain earlier this year told lenders to treat more of the 208 billion euros ($281 billion) of such deals as having gone bad again.

This was to address the risk that banks were rolling over or restructuring debts to struggling companies to conceal problems.

According to a Reuters analysis of 15 Spanish banks' results for the first six months of 2013, coverage levels for refinanced debts average out at 18.8 percent. Those of the six biggest banks range from 17 to 24 percent, the data show. <ID:L6N0I11JV>

"It's hard to establish whether the provisions reported by banks so far this year are sufficient," said one Spanish banking source familiar with recent discussions between lenders and European authorities. "But everything points to the fact that international authorities will ask for higher coverage levels."

Most banks needing extra capital would be able to raise it through selling assets, cutting dividends or issuing bonds or even shares to investors, although some small state-controlled banks are unlikely to be able to turn to the market.

But setting aside provisions also risks sapping cash that could be used to lend to the economy, only just emerging from a deep recession that has left many small firms short of credit.   Continued...