Spain Bank Stress Tests Show Capital Deficit of $76 Billion

Sept. 28 (Bloomberg) -- Mike Mckee discusses Spain's disappointing budget. He speaks on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

Spain’s banks have a capital deficit of 59.3 billion euros ($76.3 billion), less than previously estimated, according to a test designed to lift doubts about the financial industry’s ability to absorb losses.

The Bankia (BKIA) group, a nationalized lender, had a 24.7 billion-euro deficit and Banco Popular Espanol SA (POP) had a 3.22 billion-euro shortfall in stress tests conducted by management consultants Oliver Wyman and released yesterday. The tests of 14 lenders showed no deficit for seven including Banco Santander SA (SAN), Banco Bilbao Vizcaya Argentaria SA (BBVA) and Banco Sabadell SA, the Bank of Spain and Economy Ministry said in a statement.

Spain commissioned the stress test as part of terms to win a European bailout of as much as 100 billion euros for its banking system after more than 180 billion euros of losses linked to souring real estate. Demonstrating how lenders would bear an extreme scenario -- a three-year economic contraction -- is part of the government’s drive to show it’s fixing the economy while debating whether to seek another rescue package.

“The tests look credible with good methodology and it’s what Spain needed to do, but the market is still going to test them,” Luis Garicano, an economy professor at the London School of Economics, said in a phone interview.

The total capital deficit is less than the 62 billion euros Oliver Wyman estimated in June that banks would need. The 59.3 billion-euro shortfall number doesn’t account for mergers under way and deferred tax assets. With mergers and tax effects, the amount is 53.7 billion euros, according to the statement.

Shortfalls, Surpluses

Spain may end up needing about 40 billion euros of European funds for its banks, less than the stress-test shortfall, Deputy Economy Minister Fernando Jimenez Latorre said in a news conference in Madrid.

That’s because a so-called bad bank set up to house soured assets will help lenders reduce their capital needs as they also raise funds by selling businesses, he said. Spain, which will create such a vehicle under the terms of its banking bailout, will describe the criteria for doing so next week, Jimenez Latorre said.

In its worst-case scenario, Oliver Wyman said it assumed a real decline in gross domestic product of 4.1 percent in 2012, 2.1 percent in 2013 and 0.3 percent in 2014, and estimated that unemployment would rise to 27.2 percent in two years’ time. Barclays Plc predicts Spanish gross domestic product will shrink 1.8 percent in both 2012 and 2013. Morgan Stanley forecasts a 2.2 percent decline this year and 1.3 percent next.

Photographer: Angel Navarrete/Bloomberg

The Kio towers, the headquarters of Bankia SA, in Madrid. Close

The Kio towers, the headquarters of Bankia SA, in Madrid.

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Photographer: Angel Navarrete/Bloomberg

The Kio towers, the headquarters of Bankia SA, in Madrid.

Doubts Remain

The tests factored in Spanish 10-year debt yields of 7.4 percent this year and 7.7 percent in 2013 and 2014, Oliver Wyman said. The adverse scenario would mean retail mortgage default rates of 4.1 percent while accumulated projected losses on real estate developer credit would reach 43 percent of loan balances, the firm said.

The stress tests were the “biggest transparency exercise ever done,” Spanish Prime Minister Mariano Rajoy said in a speech in Vitoria, Spain, today. “Yes, we need money and it’s been lent to us and we’ll pay it back but, this is absolutely necessary to help the recovery of our financial institutions so that there is credit in Spain,” he said.

The International Monetary Fund and the European Central Bank backed the stress-test results. “These are the most demanding tests ever in Europe,” said Francisco Gonzalez, chairman of BBVA, in an emailed statement.

Even so, the exercise didn’t convince all analysts.

“They went to all this trouble but what they came up is a result that probably won’t change the opinions people had formed in June,” Daragh Quinn, an analyst at Nomura International in Madrid, said in a phone interview. “They’re still not going to convince people that they’ve definitively drawn a line under Spanish bank risks.”

Oliver Wyman’s use of 6 percent as the core capital ratio threshold in its worst-case scenario is a concern for some analysts, Quinn said. The equivalent effective rate used by Ireland for its stress test, including a buffer, was 9 percent.

Popular Plan

The seven banks with capital deficits in the adverse scenario also include the nationalized lenders Catalunyabank and NCG Banco, with a 10.8 billion-euro and 7.2 billion-euro shortfall, respectively, according to the statement.

A group including Ibercaja, Caja3 and Liberbank had a 2.1 billion-euro deficit and the Unicaja and Caja Espana-Caja Duero group a 128 million-euro surplus, the results show. Santander had a 25.3 billion-euro surplus and BBVA’s was 11.2 billion euros. CaixaBank (CABK) and Banca Civica had a combined 5.7 billion- euro surplus, while Bankinter SA (BKT)’s totaled 399 million euros.

Popular repeated its position that it won’t seek state aid and will present a business plan and strategy to bolster capital shortly, the Madrid-based lender said in a filing to regulators.

The test results follow the Sept. 27 announcement of Spain’s 2013 budget, which outlined the government’s plans to freeze public wages, end tax rebates on mortgages, tax lottery winnings and cut ministry spending. Spain is committed to cutting its budget deficit to 4.5 percent of economic output next year compared with a 6.3 percent goal for 2012.

Loan Quality

The stress tests analyzed 36 million loans and 8 million guarantees using information from the databases of lenders and the Bank of Spain, according to the statement. A team of more than 400 auditors verified the quality of loans by examining 115,000 loan operations.

The Oliver Wyman stress test follows government orders to banks in February and May to recognize 84 billion euros of losses on real estate assets and a royal decree last month that lays out a legal framework for dealing with failing lenders and setting up a bad bank to isolate soured assets.

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net;

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net Sharon Smyth in Madrid at ssmyth2@bloomberg.net

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