We dedicate this post to all the Spanish banks S&P has loved before.
For on Monday the rating agency officially revised its “Banking Industry Country Risk Assessment” of Spain’s banking system to Grupo tres since S&P now believes Spanish financial institutions are going to be operating in a “difficult economic environment over a prolonged period”.
Now, this puts Spanish banks in the same illustrious league as British and American financial institutions, with only banks in Germany, France, Italy and Canada rated higher.
There was some heart-wrenching stuff provided in the report too. For one, S&P said it anticipated credit losses would now exceed those of the 1992-1993 recession, with problem loans only peaking in 2010 — that’s to say, no recovery for Spain just yet.
The other red-alert came on the Spanish economy’s reliance on foreign funding, especially when compared to other mature economies.
However, it wasn’t all bad news.
S&P said its concerns were mainly focused on the downward pressures that would be felt this year by non-rated small and mid-sized savings banks. That’s because, as it turns out, larger Spanish banks have been been pretty good at smoothing their provisioning throughout the crisis — as, ahem, might be expected from the nation that brought you the dulcet tones of the world’s most legendary smoothie Julio Iglesias.
Which, in S&P’s opinion, means: The overall financial system should continue to benefit from ongoing profitability, supported as it is…
… by strong operating efficiency; sound and diveresified earnings, resulting from the banks’ deep relationships with clients; and a regulatory framework supporting smooth provisioning over the credit cycle.
As ever, though, the winds of change are always blowing. And the same, according to S&P, should apply to Spain’s financial system, which, in its opinion, should strive to shrink its infrastructure to adapt to a new, low-growth operating environment free of regional government control if it wants to remain on track. Or as S&P stated:
We think, however, that regional governments’ general reluctance to lose control of their savings banks is delaying the process and that some of the announced consolidation plans may not be the most suitable from an economic and business perspective. The consolidation of the savings banks provides an opportunity, in our view, to strengthen their management and limit political intervention. In our opinion, the aggressive strategies of certain savings banks during the credit boom led to some competitive distortions in the market, which we believe would best be avoided in the next credit cycle.
Related links:
Spanish borrowers don’t ❤ swaps – FT Alphaville
Stress-testing BBVA and Santander – FT Alphaville
BBVA, an exercise in Spanish banking losses – FT Alphaville
Provisioning for losses the Spanish way – FT Alphaville