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Spain Bonds, Bank Shares Fall on Capital-Plan Concern

Spanish bond yields rose and bank stocks fell, indicating the blueprint Finance Minister Elena Salgado outlined to strengthen the financial system failed to calm investor concerns.

Salgado said yesterday that lenders require no more than 20 billion euros ($27 billion) of extra capital, “all or part” of which they will be able to raise in financial markets. The amount is lower than estimates from analysts, including those at Moody’s Investors Service, who said the banks may need as much as 89 billion euros in a stressed case.

“The government has missed another opportunity to throw some light on the real recapitalization needs of the sector to the market, leaving investors with ample room for interpretation, which might prove dangerous in the current sovereign-fear environment,” Ignacio Cerezo, a banking analyst at JP Morgan Cazenove, said in a research note today.

The gap between Spanish and German 10-year borrowing costs rose to 213 basis points today from 209 basis points yesterday, compared with an average of 15 basis points in the first decade of monetary union.

Bankinter SA shares fell 5.2 percent to 4.83 euros in Madrid. Banco Santander SA, Spain’s largest lender, declined 3.1 percent to 8.76 euros and Banco Bilbao Vizcaya Argentaria SA lost 2.9 percent to 8.82 euros.

Bank Plan

Spain will also make banks adopt a core capital ratio, a measure of financial strength, of at least 8 percent, Salgado said at a news conference in Madrid late yesterday. Under the plan, core capital would correspond to the definition outlined in Basel III rules for 2013. Lenders will have until autumn to raise enough capital to meet the rules. Those that can’t will be able to tap the state’s bank-rescue fund, known as FROB, in return for ceding voting shares.

“There will always be some investors that want the government to act more forcefully and quickly on the cajas,” said Pablo Garcia, head of equities at Oddo Sociedad de Valores in Madrid. “We tend to think they have marked out a route that is adequate for the industry.”

Bankinter and Banco Sabadell SA were among publicly traded lenders with core capital ratios below 8 percent in the fourth quarter of 2010, according to estimates by Nomura International.

Madrid-based Bankinter reported a ratio of 6.76 percent last week, a level it said was adequate for its lending activity. The bank said it could sell assets if necessary and realize other gains to raise capital by 3.5 percentage points.

Cajas

Santander and BBVA will meet the new rules comfortably, spokesmen for the banks said.

Savings banks, or cajas, have been locked out of wholesale debt markets amid investor concern about 181 billion euros of what the Bank of Spain terms “potentially troubled exposure” to construction and real estate.

“It’s definitely a step in the right direction, although it still may not be far enough,” said Ricardo Wehrhahn, a partner at Roland Berger Strategy Consultants in Madrid. “It does send a strong message to the cajas, though, because it sets them a deadline to raise the capital they need. They’re going to have to present a convincing story to investors now.”

A grouping of Caja Madrid, Bancaja and five other savings banks that is the third-biggest Spanish lender estimated its core capital at 6.8 percent in a presentation to analysts last June. The lender is slated to publish 2010 earnings on Monday.

CatalunyaCaixa, a grouping of three Catalan cajas, has a core capital ratio of 6.6 percent and hasn’t decided how to raise it, a spokeswoman said today. Novacaixagalicia, a grouping of savings banks in Galicia, is among lenders that still haven’t published core capital levels.

Deadline

The Bank of Spain will decide at the end of September which lenders need capital from the FROB. The public fund will only take stakes in banks, meaning that cajas in need of funds will have to become commercial banks, Salgado said. The holdings will be temporary, lasting a maximum of five years.

“That doesn’t mean that the FROB has to contribute 20 billion euros,” she said. “Our interest, and the interest of the sector, is that all or part of that can be obtained in the markets.”

Spain, trying to persuade investors it won’t follow Ireland into a European bailout amid a surge in public and private borrowing costs, wants the savings banks to bolster their capital to improve their access to markets. The Socialist government is fighting to stem the third-largest budget deficit in the euro region and wants to convince investors that shoring up the lenders won’t overburden public finances.

“What’s positive is that they definitely have a plan in place,” said Claire Kane, an analyst at MF Global in London. “They want to get this sorted.”

Budget Deficit

The European Union’s competition commissioner, Joaquin Almunia, welcomed Spain’s efforts, his spokeswoman, Amelia Torres, told reporters in Brussels today.

Strengthening the savings banks “should enable them to return to a more appropriate financial situation better suited to their traditional role, which is providing loans to the economy,” said Torres. “It should also strengthen trust and confidence in the financial sector in Spain.”

Salgado said the program wouldn’t affect the government’s budget deficit, which will fall to 6 percent of gross domestic product this year from 9.3 percent last year. In the “worst- case scenario,” where the rescue fund would have to inject 20 billion euros, that would add 2 percentage points to the nation’s debt, which amounted to 64 percent of GDP last year.

Spain is financing itself in markets “without problems,” and the FROB, which has the capacity to take on as much as 90 billion euros in debt, would be able to do the same, she said.

Savings banks will be able to use existing methods set out in the savings-bank law to raise capital, Salgado said.

Some entities will need a core capital ratio of more than 8 percent, including most savings banks, Salgado said. Those that need more would be those that aren’t traded or don’t have a significant portion of private capital and whose dependence on wholesale markets is greater than 20 percent of assets, she said. Those details will be made clear in a new law to be passed next month, she said.

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

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net

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