(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
By George Hay
LONDON, Oct 30 (Reuters Breakingviews) - Spain at last has put a price on its banks’ stinky assets. The indebted euro zone member said on Oct. 29 that toxic property loans belonging to its most troubled lenders would be transferred to an “asset management company” (Sareb in its Spanish acronym), at around half their nominal value. But this may not prove enough to entice the private investors needed to keep the entity off the state’s books.
At first sight, the discounts - 45.6 percent losses on active loans and 63.1 percent on foreclosed assets - look conservative. They are mostly roughly in line with the adverse scenario used by consultant Oliver Wyman in the recent Spanish bank stress tests. Santander (SAN.MC), a healthy bank which will not bring assets to Sareb, has to date provisioned for a 50 percent loss rate on its foreclosed real estate assets, and its holding of these has been falling since March - an indication that the market is improving.
But other Spanish banks have ropier assets. This will make potential investors wary. Moreover, some of the government’s assumptions may be over-optimistic. Some will remember that the market value of the assets in Ireland’s bad bank is now a quarter below the price originally paid for them. With the Spanish economy shrinking, assumptions of a 14-15 percent return over Sareb’s 15-year life could be fanciful.
Yet Spain needs private investors. Otherwise it won’t keep Sareb off its balance sheet, a must since the Spanish debt-to-GDP ratio is likely to hit 95 percent next year. If at least 51 percent of Sareb’s capital - around 1.8 billion euros - can be funded privately, the bad bank doesn’t have to be consolidated, according to EU rules.
Madrid may have to throw in some extra incentives. It could try to entice the healthy banks to take part in return for cutting the fees they pay to the national deposit guarantee scheme. Furthermore, equity holders may be able to control the speed at which Sareb will sell its assets, thus making sure it doesn’t rattle the market. Either way, without sweeteners, the bad bank’s chances of avoiding full consolidation into Spain’s accounts look as sour as its loans.
- Spanish bank property loans will be transferred to the state’s new “Asset Management Company” (AMC) at an average discount of 45.6 percent, Spain’s Fund for the Orderly Restructuring of the Banking Sector (FROB) announced on Oct. 29.
- Spain plans to transfer 45 billion euros of real estate loans from so-called “Group 1” banks – BFA/Bankia, Catalunya Caixa, NCG Banco and Banco de Valencia, which are already owned by the FROB.
- A further slug of loans from the “Group 2” banks – banks with a capital shortfall identified by the Spanish bank stress test earlier this year who are unable to plug the hole privately – will be included in 2013. Total AMC assets will not exceed 90 billion euros.
- Foreclosed assets will be transferred at an average discount of 63.1 percent, with land transferred at a 79.5 percent discount.
- The FROB estimates that the AMC will have a 14-15 percent return on equity in a conservative scenario, but did not give details of its assumptions.
- FROB presentation: link.reuters.com/fav63t
- Reuters: Spain’s bad bank lures investors with steep discounts [ID:nL5E8LTHYG] - For previous columns by the author, Reuters customers can click on [HAY/]
(Editing by Pierre Briançon and David Evans)
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