Spanish Economy Still ‘Poses Headwinds’ for Lenders, IMF Says

The International Monetary Fund said a Spanish economy that’s still struggling to grow continues to “pose headwinds” for the country’s lenders, and it welcomed efforts to limit bank dividends.

“Supervisory actions to strengthen solvency and reduce risks should continue to prioritize measures that increase nominal capital (e.g. limiting cash dividends and issuing equity) over ones that reduce lending,” the IMF said today in a statement on its mission to monitor Spain’s compliance with terms of the banking-industry bailout. In a separate statement, the European Commission and European Central Bank said Spain’s economy continued to weigh on banks and called on regulators to “monitor decisively” the country’s lenders.

Spain took 41.3 billion euros ($55.9 billion) in European aid to shore up its banking system as concern mounted last year that losses building up at former savings banks such as the Bankia (BKIA) group would harm government finances. Spanish banks continue to face challenges as the economy struggles to grow after a five-year slump, driving up bad loans to record levels and sapping demand for credit.

“The mission found that implementation of Spain’s financial sector remains on track,” the Washington-based IMF said. “Nearly all the measures specified in the program have now been implemented.”

The Bank of Spain said in June that banks should moderate dividends in 2013 depending on their individual situation and capped cash dividends at 25 percent of net income. In its report today, the IMF said it welcomed that recommendation and urged supervisors to avoid taking steps on capital that might exacerbate already tight lending conditions in Spain.

The IMF also said it backed proposals to improve bank capital by allowing lenders to convert their deferred tax assets into tax claims. Even so, banks that do so should take other actions such as limiting dividends and raising capital “to further strengthen their balance sheets” so that they can foster economic growth by lending more.

To contact the reporter 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

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