Here’s a late addition to FT Alphaville’s collection of unofficial European bank stress tests being put out in advance of the actual certified versions on July 23.
This one’s from Fitch. The test focuses on Spanish banks’ domestic loan books — for which read the country’s cratering real estate market.
Here’s what the rating agency tested (our emphasis):
Fitch Ratings has carried out three different stress tests focusing on the Spanish banking system’s end-December 2009 domestic loan portfolio (57% of total assets). According to Fitch’s estimates, under all scenarios, the total funds available under the Fund for Orderly Bank Restructuring (FROB) of EUR99bn are more than sufficient to achieve a 6% common equity to assets ratio for the overall Spanish banking system, helped by the existence of loan impairment and other reserves of EUR68bn at end‐2009.
Here are the results, in graph form (click to enlarge):
And here’s how Fitch got them:
Fitch obtained end-2009 data on lending, foreclosed and other acquired real estate assets, loan impairment and other reserves and equity for the entire banking system and its constituents from the Bank of Spain Statistical Bulletin and its Financial Stability Report of March 2010. The agency then carried out three different stress test scenarios that comprised a base case scenario which is a reasonable estimate of what could take place, another which replicates the collapse of the Irish property sector since 2008 and, lastly, one that contemplates the decline in residential land prices in Japan between 1991 and 2005.
Mutating Spain into Ireland (or Japan). Now that is stressful. However — some caveats from Fitch:
At end-2009, the system’s gross domestic loan portfolio totalled EUR1,837bn, accounting for around 57% of total assets. Of this amount, around 59% was made up of mortgages. The remainder of the balance sheet largely related to foreign lending and to the fixed‐income and equity securities portfolios. The latter have increased since end-2007, in line with liquidity management needs. When stressing domestic assets, Fitch has only focused on credit losses that could derive from the system’s domestic lending exposure and foreclosed and acquired real estate assets, as these assets are more sensitive to the current sluggish economic cycle in Spain and to the collapsed domestic property sector…
Fitch is not able to estimate the amount of substandard or restructured domestic loans as at end-2009, as this information is not readily available. The amount of these loans could potentially become problematic, increasing the initial PD above the reported figure; however, Fitch assumes that these loans are included in the stressed NPL figure.
And now for some caveats of our own. Fitch’s estimates of how much FROB money might be needed in extremis is indeed well within the €99bn total funds on offer — even the €57bn-odd needed to achieve 6 per cent equity to assets in the Japanese scenario.
But FROB must raise amounts north of €9bn via borrowing on capital markets. As a sub-sovereign issuer, FROB’s performance there is correlated with that of Spain itself. Not the best role model at the moment.
There’s also the wider uncertainty that policy over restructuring the cajas remains a multifarious mess at the moment, as Fitch itself notes:
While processes appear to be speeding up, mergers have been slow as the cajas’ ownership structures are unclear and there are opposing political interests within their governing bodies. Of the 45 existing Spanish cajas, 37 are involved in 12 different processes, seven of which are outright mergers, while the remainder are integrating under an Institutional Protection Scheme mechanism (cross‐guarantee or SIP).
The cajas’ de facto privatisation is also proceeding apace with new laws enabling them to issue equity to private investors, as Ibex Salad observes. Possibly a workable mess then. But a mess for stress-testing all the same.
Nevertheless, we’re keen for more unofficial stress-tests. For example, if only there was a crack German analyst — ideally one with a fantastic forecasting record — who could take on the Landesbanks…
Related links:
BNP Paribas: ‘Avoid Spanish banks for now’ – FT Alphaville
Any scenario possible for Spanish bank funding, says JPM – FT Alphaville
An €11bn stress test scenario for Santander, BBVA – FT Alphaville
The non-performing pain in Spain goes on, and on – FT Alphaville