Spanish Banks Brace for Sub-Zero Rates Squeezing Revenue

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Just when Spanish banks thought the worst was over, lenders are responding to another attack on their revenue as mortgage reference rates edge toward zero.

Spain has one of Europe’s highest amounts of loans whose payments rise and fall with the Euribor benchmark, which has dropped for 12 successive months, to 0.16 percent. Banco Sabadell SA is including a clause in new loans to stop further decreases in interest payments should Euribor go negative. CaixaBank SA said its contracts already allow the bank to hold the benchmark at zero for payments on existing loans.

“As long as the law allows for it, it makes sense for banks to take measures to manage risks and protect their balance sheets,” said Jose Luis Martinez Campuzano, a strategist at Citigroup Inc.’s Citibank in Madrid.

While it’s been three years since the rescue of Spain’s financial industry, banks are dealing with a squeeze in profitability on loans because of the European Central Bank’s bond-buying program, whose liquidity helped push down Euribor rates. Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s largest banks, posted a decline in net interest income from their Spanish units in the first quarter.

Of 444 billion euros ($481 billion) of variable-rate home loans in Spain, most charge borrowers a spread over Euribor. Campuzano didn’t rule out that 12-month Euribor follows the three-month rate to fall below zero, though he said the rate has reached a stable level between 0.15 percent and 0.20 percent.

Euribor’s Slide

When most Spanish mortgages were made in past years, few bankers probably imagined the rate they charge each other for loans -- the euro interbank offered rate, or Euribor -- could go from its 15-year average of 2.13 percent all the way to negative for one-year terms. Euribor for three-month interbank loans was at negative 0.013 percent on Thursday.

For existing mortgages, Barcelona-headquartered Sabadell will not impose a floor to the benchmark, and could even return money to clients, according to a Sabadell spokeswoman, who spoke on condition she not be named. Mortgages comprise about 54 percent of Sabadell’s loan portfolio.

Bankia SA is among Spanish banks that will allow a client to benefit in the case of 12-month Euribor decreasing below zero, as it would add the negative rate to the spread, an official at the lender said.

Bankinter SA would do so when the negative rate is big enough to wipe out all interest payments on the loan. Press officers for BBVA, Santander and Banco Popular SA declined to comment. A spokesman for ING Bank NV, which does business in Spain as ING Direct, wasn’t immediately available to comment.

Common Rule

“A common rule is needed so all banks have the same policy in such an important issue as the Euribor evolution,” Santos Gonzalez, president of the Spanish Mortgage Association, said in an interview. The Bank of Spain, the country’s central bank, hasn’t ruled on the matter, a spokeswoman said.

Setting up “floors” for mortgage contracts is not new for Spanish lenders, although these clauses have been a source of legal disputes for many of them. A floor sets a minimum rate for a loan that will be supported even when market rates are lower.

The Spanish Supreme Court in 2013 ruled that the mortgage floor clauses of three lenders, including BBVA, didn’t meet transparency requirements and should be removed from contracts.

As some lenders are reducing spreads on variable-rate mortgages, analysts are warning about the effects a price war in the loans market might have on earnings.

“We expected a reduction in spreads during the year, but the speed of that reduction has been higher than what we initially thought,” said Maria Paz Ojeda, an analyst at JB Capital Markets. “It could impact negatively on earnings in coming quarters.”

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