(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 treatment.
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.
- 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)
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