Here’s a rather pointed rejoinder from Credit Suisse, on the matter of Spanish banks:
Contrary to some investors and analysts, we are not particularly concerned about the solvency of the institutions we cover.
The idea that Spain’s banks are not technically insolvent (hooray) is about the limit of Credit Suisse’s bullishness, however.
The rest of the 59-page note reads mostly like this:
The Spanish financial system has proved more resilient than the European average and has delivered relatively strong earnings generation thanks to its good efficiency and productivity. However, we are more negative than the market on the structural profitability of the system which is likely to be negatively affected by the P&L effort required to deal with the €322bn exposure to real estate developers, declining coverage ratios and restructured loans (we believe [non-performing loans] are understated by c.30%). Falling margins going forward would increase the pressure on results and we expect a 24% decline in profitability in 2010 vs 2009.
In fact, according to Credit Suise, Spain’s stock of non-peforming loans has increased from €69bn to a whopping €85.6bn over the past year and a half, while the NPL ratio (non-performing loans over total loans) has moved from 1.7 per cent at the end of June 2008, to 4.6 per cent at the end of June 2009.
There’s also (again) the matter of loans that have been restructured and refinanced. Here’s Credit Suisse’s Santiago López Díaz with a bit more detail:
The most important problem, however, in our opinion, is related to the amount of loans that have been refinanced or restructured in the past year an a half. It is virtually impossible to know how much each company has restructured, but BBVA alone renegotiated around €4.5bn in loans in Spain during 2008, an amount representing approx 2.4% of its resident loan book. We do not believe that BBVA has been particularly aggressive. In fact we believe that some other companies have been more active in terms of refinancing loans. Contrary to other financial systems, banks in Spain do not have to report the amount of loans that have been restructured. That is, in our opinion, where the big problem might be, although we can’t see it today.
The average NPL ratio of the listed Spanish banks is 3.6% and, if BBVA numbers are any indication of what is going on in the market, the restructured loans could be as high as 70% of the current stock of NPLs. Not all these restructured loans would run into trouble, but some of them, in our opinion, definitively will over time. We believe it is not correct to add directly to the NPL ratio the whole amount of the restructured loans and acquired assets, but it is clear that NPLs would have been higher than reported if not because of the aforementioned practices.
Unsuprisingly then, Credit Suisse has downgraded BBVA from neutral to underperform, and confirmed its underweight ratings on the rest of Spain’s banks.
Related links:
Spanish catastrophe, datapoint del dia – FT Alphaville
Are Spanish banks hiding their losses? - FT Alphaville
Surprise! Spanish banks are not hiding their losses! - FT Alphaville