The outlook for the Spanish banking system remains negative because profitability will be “severely tested” as loan demand falls and defaults and funding costs increase, Moody’s Investors Service said.
The country’s banking industry faces a net capital shortfall of 17 billion euros ($22.5 billion), based on a calculation that assumes a minimum 8 percent Tier 1 capital ratio, Moody’s said in its outlook report today. The Tier 1 ratio is a key measure of financial strength.
Spanish lenders are grappling with mounting bad loans, weak demand for credit and higher costs for wholesale and retail funding as the country attempts to trim the third-biggest budget deficit in the euro region and emerge from the worst recession in 60 years.
Banks in the country have only recognized 88 billion euros of losses through writedowns and use of reserves, compared with Moody’s base-case scenario of 176 billion euros of losses estimated across the whole life of the industry’s loan books, according to the ratings firm.
“We expect profitability to be seriously tested going forward, as demand for loans will likely fall and funding costs increase at a time when provisioning requirements remain high,” said the report’s authors, Alberto Postigo and Antonio Garre.