Breakingviews- Sabadell capital hike puts heat on Spanish peers

Tue Sep 10, 2013 5:29pm IST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

By Fiona Maharg-Bravo

MADRID, Sept 10 (Reuters Breakingviews) - Banco Sabadell’s (SABE.MC) latest capital hike puts the heat on its Spanish peers. The lender is raising up to 1.4 billion euros to bolster its balance sheet ahead of tighter regulatory requirements. Given that a cloud of uncertainty still hangs over Spanish banks’ capital positions, Sabadell probably won’t be the last to do so.

The biggest capital question concerns how Madrid treats deferred tax assets (DTAs), where past losses can be used to reduce future tax bills. Basel III capital reforms generally seek to limit their use, but Spanish banks argue they are justified because a portion are due to generic provisions enforced by their own government.

It’s a high-stakes debate. DTAs account for one-third of the sector’s core Tier 1 capital, according to the International Monetary Fund. Sabadell has a bigger DTA headache than others, because it generated loads of them after buying CAM, the loss-making savings bank. At the end of June, DTAs accounted for roughly 500 basis points of its core Tier 1 ratio of 9.5 percent.

The capital hike will boost the ratio to 11.3 percent. Assume that Spanish banks eventually get credit for about half of their DTAs – the current expectation – and Sabadell would have a fully loaded Basel III ratio of just under 9 percent. This isn’t high relative to European peers, but it gives breathing room.

The DTA effect is less dramatic for other lenders, ranging from 158 bps for BBVA (BBVA.MC) to 330 bps for Caixabank (CABK.MC), Morgan Stanley reckons. But the government is hoping to sell two nationalised lenders – NovaCaixaGalicia and Catalunya Caixa – both of which have large tax credits. Bidders will want some extra cushion to deal with these. Banks have until 2019 to be fully compliant with Basel III regulations, but investors aren’t that patient.

What’s more, Spanish banks face other regulatory hurdles, in the form of increased provisions for refinanced loans, and the forthcoming European-wide asset quality review (AQR). Santander (SAN.MC) could face a near 2 billion euro capital shortfall arising from the AQR alone, according to Deutsche Bank. With Spanish bank prices surging amid increased optimism over Spain’s recovery, other banks could soon follow Sabadell’s lead.

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CONTEXT NEWS

- Spain’s Sabadell said on Sept. 9 it would carry out a capital hike of up to 1.4 billion euros to strengthen its balance sheet ahead of stricter regulatory demands. The bank will raise 650 million euros through an accelerated bookbuild to institutional investors, including Colombia's Itos Holding and U.S.-based Fintech Investments. The rest will be offered to existing investors through a rights issue.

- The lender said it hoped to take advantage of business opportunities in Spain as the economy improves. Its core capital would be around 11 percent following the capital increase. Sabadell shares were trading up 0.3 percent at 1.80 euros a share on the morning of Sept. 10.

- Reuters: Spain's Banco Sabadell to hike capital by up to 1.4 bln euros [ID:nL5N0H539P]

- For previous columns by the author, Reuters customers can click on [BRAVO/]

(Editing by George Hay and Sarah Bailey)

((fiona.bravo@thomsonreuters.com)) Keywords: BREAKINGVIEWS SABADELL/

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