A Necessary Step Forward but Important Challenges Ahead
Mandatory Real Estate Cover
One of the measures taken by Spain’s new government to stimulate credit and promote economic growth is the reform of the banking system, with a focus on imposing more demanding coverage levels on banks’ real estate (RE) exposures through income statement provisions and capital buffers. These requirements will place significant pressure on banks’ stretched income statements and capital management strategies at a time when Spain enters into recession, stimulating consolidation.
Neutral Rating Implications
From the information available to date, Fitch Ratings believes that there are a number of institutions, mostly the largest ones, including the two large international Spanish banks, that are able to meet both the new provisioning and capital buffers, without any impact on their ratings. This is because of the one-off nature of the reform in 2012.
Negative Rating Implications
Smaller banks, particularly those with capital injections from the state‟s Fund for Orderly Banking Restructuring (FROB), will face difficulties in complying with requirements in just one year, given their low revenue generation capacity (which could lead to losses) and tighter capital, and will be forced to merge. For the stronger institutions that merge with weaker institutions, there will be downward rating pressure from the potential weakening of their risk profile, additional provisioning and capital needs, and execution risks.
You can see the full report “Higher Real Estate Coverage for Spanish Banks” on www.fitchratings.com.