Lisa Hintz of Moody’s Capital Markets Research Group, who last month warned on German banks, is a touch concerned about the strength and stability of the Spanish banking system.
In her most recent note, Ms Hintz points out that the CDS market is signalling the possibility of a large Spanish bank running into trouble – which the analyst believes is a real risk. From the note, emphasis ours:
As Spain continues to weaken, we believe there is a non-trivial possibility of a systemic shock to the Spanish banking market, most likely from a large failure of a covered bond issuer. Banco Sabadell, which is currently trading at a CDS-implied rating of Ba1 and a gap of -7, is a candidate.
We note that the trigger for the need to save Hypo Real Estate in Germany was its inability to roll over financing for DePfa in Ireland, an outcome which could have dried up funding for German residential and commercial property. Sabadell has €1.5 billion due July 7. The bonds are trading at spreads implying a rating of Aa2, a notch above its senior unsecured rating of Aa3, so the bond market does not seem worried. Perhaps Spain will back up Sabadell if it can’t pay.
However, Spain is also having to take on problems in the savings sector, and is trying to merge those banks, leaving it with fewer resources to solve a major problem. The European Union could come to the rescue, but not likely before some panic sets in.
How long can the Spanish banks outrun the massive asset deflation occurring in their home market? The last two quarters have shown rapid credit deterioration, and non-performing loans are now multiples of what they were a year ago (two to four times at the strongest banks). Additions to reserves as a percent of non-performing assets have declined, and as a result, so have coverage ratios.
This decline would be appropriate if Spain were nearing the end of its recession. But we do not think it is nearing the end. With unemployment now over 17%, and youth unemployment over 35%, capacity for repayment is reduced in the mortgage and consumer sectors. The unemployment rate indicates the lack of strength in the corporate sector. Nearly 25% of Spanish GDP at the peak had been related to real estate development.
And here is a rather frightening chart of delinquency rates in Spanish RMBS, for good measure
Related links:
Los covered bonds por favor – FT Alphaville
Lex on Spain’s troubled banks – FT
A stress unconfessed – FT
Spanish banks should be wary of gloating – FT