From Santander’s 2009 result statement on Thursday:
The chart above shows how Santander’s Spanish NPL ratio rose from 1.95 per cent to 3.41 per cent in 2009 and its coverage ratio (loan loss reserves divided by NPLs) fell from 98 per cent to 73 per cent.
Of course, that does come in the context of the bank not only achieving its 2009 target of €8.9bn profit, but generating a 24 per cent rise in its net operating income in the year of €22.9bn.
Nevertheless, while Santander might be amongst the most diversified of the Spanish banks, the domestic market still accounts for some 30 per cent of its business.
Given the current sovereign jitters surrounding Spain it’s natural that comments about additional provisioning by the bank could be seen as worrying. The bank said on Thursday it had increased generic provisions by €1.5bn and written down the portfolio of acquired properties with €814m of provisions, covering 32 per cent of the value at acquisition.
Looking at it more closely, though, it might not be so bad. Santander did say non-performing loan ratios were slowing on the quarter, while coverage ratios have been on the rise. All of which is encouraging.
What’s more, much of the above provisioning was voluntary. Santander it seems prudently set aside gains generated by extraordinary items for generic loan-losses, properties purchased in the period, Metrovacesa losses, its restructuring fund and its pension fund.
The question mark, however, hovers over Santander’s decision to revalue its €4.3bn portfolio of acquired properties in the first place. As the bank stated on Thursday:
With these voluntary provisions, as they are clearly above the supervisor’s requirements, Banco Santander has strengthened the fund covering the loss of value of acquired properties. This fund now amounts to EUR 1,368 million, so that properties in the Bank’s books, which were acquired for EUR 4,304 million, are now valued at EUR 2,936 million. This means that the Bank would be able to assume a 32% depreciation of the value of those properties with no effect on the income statement.
So what prompted Santander to suddenly brace itself for a 32 per cent depreciation of the property-assets acquired? A sudden realisation they were potentially worth so much less, or a prudent smoothing-out of potential losses to come?
The truth is we’ll probably never know until the assets are sold and the values are realised. And, from what it looks like, the bank is biding its time until the market recovers to do so.
Related links:
BBVA, an exercise in Spanish banking losses – FT Alphaville
Shadow bank losses – FT Alphaville