(The author is a Reuters Breakingviews columnist. The
opinions expressed are her own.)
By Fiona Maharg-Bravo
MADRID, Sept 17 (Reuters Breakingviews) - Spanish banks are
feeling hard done by. They are being accused of trying to
improve their headline core capital ratios by asking the
government to change accounting rules on deferred tax assets.
The Bank of Spain’s governor, facing preemptive criticism,
insists the move “is no gimmick”. To some extent, he is right.
Spanish banks currently hold some 51 billion euros of
deferred tax assets, amounting to about a third of their core
Tier 1 capital, according to the International Monetary Fund.
Under the new Basel III rules, those have to be excluded from
the calculation of their capital ratios, to the detriment of the
banks’ weak balance sheets.
Not all deferred tax assets are created equal, however.
About 29 billion euros of Spanish bank DTAs relate to operating
losses, according to JP Morgan (JPM.N) estimates. Those can be
used to reduce a bank’s future tax bill when it returns to
profit. But in the event of bank liquidation, they have no
capacity to absorb losses. Excluding those tax assets from
capital makes sense.
Another 21 billion euros are DTAs related to so-called
“temporary differences”. These were mostly generated after the
government forced Spanish banks to take large precautionary
provisions on their property portfolios. Under current Spanish
tax rules, they aren’t fully deductible until the loss is
recognized, generating a large deferred tax asset.
Spanish and Italian bankers argue that writedowns are fully
tax-deductible in some other European jurisdictions. Italian
banks faced a similar predicament because their tax law also
limits the tax deductibility of writedowns. They found a way
around the issue by getting their government to convert these
tax assets into tax credits under certain circumstances,
including insolvency. Spanish banks are hoping for a similar
Yet even if Spanish banks get their way, capital will still
be tight. If they can count DTAs arising from temporary
differences as equity, the average core Tier 1 capital ratio
would be at a little over 9 percent by year-end, according to
Morgan Stanley (MS.N) estimates. That’s below the European
average of 10 percent. Furthermore, even if these DTAs do count
as capital, their economic value might be limited. Exane BNP
Paribas reckons it would take Bankia (BKIA.MC) and Sabadell
(SABE.MC) over 25 years to use up all the DTAs on their books.
Little wonder Sabadell recently opted for raising fresh capital.
Others may want to follow suit.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Spanish banks are lobbying the government for a change in
the accounting treatment of deferred tax assets.
- A senior government official told the Financial Times
that Madrid was working towards a solution that would mirror the
changes made in Italy, which allowed banks to convert deferred
tax assets into tax credits.
- For previous columns by the author, Reuters customers can
click on [BRAVO/]
(Editing by Pierre Briançon and Viktoria Dendrinou)
Keywords: BREAKINGVIEWS SPAIN/BANKS
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