Zapatero's Bid to Lure Investors to Cajas May Prove `Impossible for Now'

Spanish Prime Minister Jose Luis Rodriguez Zapatero wants to lure private investors to the country’s savings banks to share the burden of shoring up their capital. It won’t be easy, analysts and investors said.

“Mr. Zapatero can do lots of things like raise VAT or cut social benefits, but something he can’t do is force a private investor to put his money in a caja if he doesn’t want to,” said Pablo Garcia, head of equities at Oddo Sociedad de Valores in Madrid. “I’m afraid it’s just impossible for now.”

Momentum may be building for the state to provide more capital to the savings banks to restore confidence in an industry and economy stricken by lending to property developers, said Inigo Lecubarri, who helps manage about $200 million at Abaco Financials Fund in London. The savings banks, or cajas, are regional institutions run as foundations that helped fund the property boom and account for about half of Spain’s loans.

Zapatero’s challenge is to fix the savings banks without derailing plans to cut the euro region’s third-largest budget deficit, just two months after losses at Ireland’s banks forced the country to seek an 85 billion-euro ($114 billion) rescue from the European Union and International Monetary Fund. The government would prefer private investors to fill the cajas’ capital hole, Deputy Finance Minister Jose Manuel Campa said this month.

Spain has already lent the cajas about 11 billion euros, equivalent to 1 percent of gross domestic product, and they may need as much as 50 billion euros in additional capital as bad loans pile up, analysts at Evolution Securities estimated in a Jan. 20 report.

‘Praiseworthy’

Officials have played down such estimates. Finance Minister Elena Salgado told reporters in Brussels this week the capital needs “would be very far” from the 30 billion euros to 80 billion euros reported in El Confidencial, an online publication.

Spain’s efforts to reorganize the savings banks so far have been “praiseworthy,” up to a point, Garcia said. The number of cajas declined to 17 groups from 45 after the Bank of Spain pushed them into mergers to cut costs and underpin the weakest lenders. The government also changed the law to make it easier for cajas to raise capital from private investors and become commercial banks.

A group led by Caja de Ahorros del Mediterraneo and Cajastur is among cajas pooling their banking operations and selecting more experienced managers to distance themselves from a model of regional banking that was susceptible to political influence.

Perception and Reality

Savings banks will have to detail their risk linked to developers and real estate by the end of this month in a bid to quell investors’ concerns before European stress tests.

“When the perception of reality is much worse than reality itself, the best possible reaction is to explain it in the greatest detail,” Bank of Spain Governor Miguel Angel Fernandez Ordonez said Dec. 13.

As they release year-end accounts, savings banks will make additional provisions of more than 26 billion euros, after taking writedowns against earnings of 47 billion euros since 2008, according to the Bank of Spain.

The “underlying message” from the central bank is that it wants to see the cajas start to show they can raise private capital, Arturo de Frias, head of banking research at Evolution, said by phone. Barcelona-based La Caixa, which already has an investment holding company, might be the first to try, he said.

“There is a roadmap in which the cajas go through certain steps and then there’s a further step, which is raising private capital,” said de Frias.

‘Root-and-Branch’

Some investors say the roadmap doesn’t go far enough to make the struggling institutions attractive as a potential investment, especially when weighed against profitable competitors such as Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, the nation’s largest lenders.

“Investors want a simple model and transparency,” said Julian Chillingworth, who helps manage about $20 billion at Rathbone Brothers Plc in London, who added that investors still “get confused” by the lenders. “My view is that a much more root-and-branch solution is required for the cajas and I’m not sure the political will is there to do it.”

J.C. Flowers & Co., a U.S. buyout firm that agreed in July to buy 450 million euros of convertible bonds from Banca Civica, a grouping of savings banks, later put the talks on hold. Christopher Flowers, the firm’s founder, said in December he hoped to resume the discussions once Banca Civica finished talks to merge with Cajasol, another savings bank.

Banca Civica was one of seven European banks, including five cajas, that failed EU stress tests in July. Ninety-one banks were tested in all.

‘Government Led’

Investors still have doubts about the potential losses associated with Spanish real estate and an economy struggling to emerge from recession, said Oddo’s Garcia. Including developers and other kinds of risk, the country’s lenders may have to make additional impairments of 142 billion euros, including 83 billion euros by savings banks, according to Evolution.

The cajas will also have to go beyond addressing concerns about their short-term capital position and explain to investors their “business plan for the future,” Campa said on Jan. 14.

Spain’s banks have “potential troubled exposure” to construction and real estate of 181 billion euros, according to the Bank of Spain.

Chris Bowie, head of credit portfolio management at Ignis Asset Management, said he would be “very skeptical” about buying debt issued by cajas, as he doesn’t “agree with their interpretation of their asset strength.”

“For us to see a Spanish caja as attractive it’s going to have to have a yield that’s substantially wider” than the 10 percent or more of some sub-investment grade bonds in the U.K., he said by phone from Glasgow, Scotland. The recapitalization “will have to be government-led,” he said.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net.

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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