Spanish Banks Need More Capital Than Tests Find, Moody’s Says

Photographer: Angel Navarrete/Bloomberg

Customers gather around a broken automated teller machine (ATM), outside at a BBVA bank branch in Madrid. Close

Customers gather around a broken automated teller machine (ATM), outside at a BBVA bank branch in Madrid.

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Photographer: Angel Navarrete/Bloomberg

Customers gather around a broken automated teller machine (ATM), outside at a BBVA bank branch in Madrid.

Spain’s banks face a capital shortfall that could climb to 105 billion euros ($135 billion), almost double the estimate the government provided last week, according to Moody’s Investors Service.

The nation’s lenders may need infusions of 70 billion euros to 105 billion euros to absorb losses and still keep capital ratios above thresholds outlined in legislation last year, Moody’s analysts wrote yesterday in a report. That compares with the 53.7 billion euro shortfall found last week after officials commissioned a stress test designed to lift doubts about the financial industry’s ability to withstand losses.

“The recapitalization amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,” the analysts, Maria Jose Mori and Alberto Postigo, said in the report. “If market participants are skeptical about the stress test, negative sentiment could undercut the government’s efforts to fully restore confidence in the solvency of Spanish banks.”

Spain announced the results of the test, conducted by management consulting firm Oliver Wyman, after commissioning the review of 14 lenders as part of terms to win a European bailout of as much as 100 billion euros for its banks. Lenders suffered more than 180 billion euros of losses linked to souring real estate loans. The government ordered banks in February and May to recognize 84 billion euros of losses on real estate assets.

Extreme Scenario

The 53.7-billion-euro figure takes into account mergers under way and deferred tax assets, the Bank of Spain and Economy Ministry said in a Sept. 28 statement. Without those effects, the shortfall climbs to 59.3 billion euros, according to the statement. The estimate is less than the 62-billion-euro shortfall found by Oliver Wyman in June.

Demonstrating lenders’ ability to withstand 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.

While many assumptions in the stress test were conservative, some may be questioned, Moody’s said. The test used a 6 percent core capital ratio under a stressed scenario, while the ratings firm assumed capital ratios of 8 percent to 10 percent, according to the report. The rate used by Ireland for its test, including a buffer, was 9 percent.

Banco Popular

The review showed no deficit for seven Spanish lenders, including Banco Santander SA (SAN), Banco Bilbao Vizcaya Argentaria SA (BBVA) and Banco Sabadell SA. The Bankia group, a nationalized lender, had a 24.7 billion-euro deficit and Banco Popular Espanol SA (POP) had a 3.22 billion-euro shortfall. Banco Popular slid more than 6 percent yesterday after the firm said it will seek to raise as much as 2.5 billion euros from a stock sale and suspend its October dividend.

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.

Even as Moody’s expressed concerns that the government underestimated the banks’ capital needs, a recapitalization is still “intrinsically credit positive” for all of the nation’s lenders since it would involve more capital and more banks than earlier efforts, the ratings firm said.

To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell27@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net.

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