BBVA Says Spain Court Ruling on Mortgage Floors to Reduce Profit
Banco Bilbao Vizcaya Argentaria SA (BBVA) said its profit will be hurt after a court ruling prompted Spain’s second-biggest bank to stop applying “floors,” or clauses setting minimum interest rates, on mortgages.
The bank fell as much as 2.9 percent in Madrid trading after it estimated the change would reduce profit for June by 35 million euros ($46.7 million) and said the future impact will depend on the evolution of Euribor, the interest-rate benchmark widely used for mortgage loans in Spain.
Spain’s Supreme Court ruled that mortgage floor clauses that don’t meet transparency requirements, including BBVA’s, will be considered null, the Bilbao, Spain-based lender said in a regulatory filing yesterday. The decision marks another blow for a Spanish banking system reeling from the impact of mounting defaults, shrinking credit demand and tougher capital rules.
“There is a risk from this and it’s definitely an issue,” said Antonio Ramirez, an analyst at Keefe, Bruyette & Woods Ltd., who downgraded BBVA to “market perform” from “outperform.” “There is clearly a much bigger incentive for clients to sue the banks and get these mortgage floors removed now that the Supreme Court has set a precedent.”
Some Spanish banks, including BBVA, have relied on interest-rate floors written into mortgage contracts to shield them from a decline in Euribor, the benchmark for most of Spain’s 600 billion-euro stock of home loans. One-year Euribor was 0.484 percent in May, down from more than 5 percent in 2008.
The removal of floors may reduce BBVA’s earnings by 5 percent in 2014 and 2 percent in 2015, Alvaro Serrano and Sara Minelli, analysts at Morgan Stanley, said in a research note published today.
As much as 70 percent of the mortgage book at BBVA, or about 55 billion euros of loans, have floors with an average rate of 2.65 percent, Benjie Creelan-Sandford, an analyst at Macquarie Bank Ltd. in London, said in a May 17 report. Sabadell SA has 25 billion euros of mortgage loans with floors set at an average rate of 3.5 percent and Popular has about 37 billion euros of loans with floors, Creelan-Sandford wrote.
The Supreme Court ruling does not strike down floors on mortgages that were explained to customers in a clear and transparent way, said a spokesman for Sabadell (SAB) in Barcelona, who asked not to be identified by name in line with its policy. The bank intends to keep the floors because the bank can demonstrate it applied them in a transparent fashion, he said.
A spokesman for Popular declined to comment in a phone interview. Popular Chief Executive Officer Francisco Gomez told shareholders this week that floors were an “essential condition” of contracts and their use helped the bank to fix the price of loans and make them available to clients.
In a 2010 report on mortgage floors, the Bank of Spain found that of 49 lenders, 16 applied them on more than 85 percent of their loans, while 23 used them rarely or not at all. The average floor level was 3.12 percent.
“In accordance to the decision of the Supreme Court, BBVA will cease to apply such floor clauses to consumer mortgage loans, with effect from May 9, 2013, although it reserves its right to possible appeals,” the bank said in its statement yesterday.
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