Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA, Spain’s biggest lenders, were cut three levels by Moody’s Investors Service, which cited a recession and mounting loan losses in downgrading 16 of the nation’s banks.
Nine firms were cut three grades and seven were kept on review for further reductions, Moody’s said yesterday in a statement. Santander’s U.K.-based subsidiary also was cut.
The moves followed Moody’s May 14 downgrade of 26 Italian banks and its Feb. 13 cut of Spain’s sovereign debt. The main drivers for the Spanish bank downgrades were a surge in soured loans, the recession, restricted funding access and the reduced ability of the government to support lenders as its own creditworthiness diminishes, Moody’s said.
“Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness,” the ratings firm said. “The Spanish economy has fallen back into recession in first-quarter 2012, and Moody’s does not expect conditions to improve” this year.
Shares in the lenders rebounded today in Madrid trading after sliding for a week on concern that the nation’s financial system is deteriorating. Santander rose 2.9 percent, its first gain since May 10. BBVA (BBVA) climbed 3.7 percent and CaixaBank SA rose 2.2 percent. Banco Popular Espanol SA advanced 1.3 percent.
Concern about the possible expense to the government of bailing out banks’ real-estate losses has helped to drive up the country’s borrowing costs. The extra yield on Spanish 10-year bonds compared with German bunds narrowed to 484 basis points today from 490 basis points yesterday. A basis point is a hundredth of a percentage point.
The government, in its latest attempt to bolster confidence in banks, said on May 11 it will hire two auditors to value lenders’ assets and told banks to set aside about 30 billion euros ($38 billion) against healthy real estate loans. That’s on top of 53.8 billion euros of charges and capital ordered in February. The government will lend funds to struggling banks and expects to use less than 15 billion euros doing so, Economy Minister Luis de Guindos said last week.
Deputy Prime Minister Soraya Saenz de Santamaria didn’t comment today when asked at a news conference whether the government was considering seeking assistance from the European Union to shore up lenders.
Bad Loans Rise
“You ask about what the government is going to do with the banks and a request for some kind of aid,” she said after the weekly Cabinet meeting. “As to what the government is doing with the financial sector, it did it in February, and the second step was taken in the Cabinet last week.”
EU Economic and Monetary Commissioner Olli Rehn said Spain can clean up its banks on its own.
“Spain is not comparable to, for instance, Ireland, which had a banking sector many times larger compared to gross domestic product,” Rehn said in a Bloomberg Television interview in London today. “Spain has the starting point that it can deal with this challenge on its own without resorting to European assistance.”
The ratio of bad loans to total lending surged to 8.37 percent in March, the highest since 1994, compared with less than 1 percent in 2007, the Bank of Spain said today. Lenders have 184 billion euros of what the Bank of Spain terms “problematic” real estate-linked assets after taking property onto their books after the boom collapsed in 2008.
“If you look at the reported numbers so far, you don’t see that much deterioration on residential mortgages or on non-commercial real estate corporates and SMEs,” said Johannes Wassenberg, a managing director at Moody’s covering European banks. “If you look at the renewed recession you have in Spain and the very high unemployment rate, in our view that’s likely to have a knock-on impact on these broader asset classes.”
Moody’s announced in April that it would start downgrading banks around the world. After beginning with Italy and Spain, the review will move on to countries including Austria, the U.K. and Germany. U.S. investment banks may have their ratings changed next month, when the review is expected to conclude.
Santander and BBVA were both cut to A3, the same as the Spanish government, from Aa3, according to Moody’s. The U.K. unit of Santander was downgraded to A2. The rating change has “no impact” on the business nor on plans for growth, the U.K. unit said in a statement yesterday.
There hasn’t been a pickup in withdrawals from the U.K. bank, a spokeswoman said. “After a raft of media coverage there has been a slight increase in customer inquiries,” said Sarah Davies, a Santander U.K. spokeswoman. “Generally the inflow and outflow levels aren’t particularly above the normal range and are nothing causing concern,” she said by phone today.
Customers phoned up and asked whether the bank was covered by the U.K.’s financial services compensation scheme, a government-backed, industry-funded program that pays out when companies go bust. It is covered by the program, Davies said. The bank is regulated by the Financial Services Authority and its parent bank can’t access any of its money via loans or dividend payments without FSA approval, she said.
Spain’s government on May 9 took over the Bankia (BKIA) group, the lender with the biggest Spanish asset base, after it filed 2011 earnings without certification from auditors.
Deputy Economy Minister Fernando Jimenez Latorre yesterday denied deposits were leaking from Bankia after El Mundo newspaper reported that 1 billion euros had been withdrawn by customers since May 9. Bankia’s newly appointed chairman, Jose Ignacio Goirigolzarri, said yesterday that the bank’s activity had been “basically normal” in recent days.
Moody’s on Feb. 13 cut the debt ratings of Spain and five other countries including Italy and Portugal, citing Europe’s debt crisis. On April 30, Standard & Poor’s cut its credit ratings for 11 Spanish banks, including Santander and BBVA.
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