Sabadell, Bankinter to Repay ECB Loans as Investors Return

Banco Sabadell SA and Bankinter SA, the first two Spanish banks to publish full-year earnings, committed to starting to repay emergency loans from the European Central Bank as investor confidence improves.

Sabadell plans to return 1.5 billion euros ($2 billion) of 24 billion euros in three-year money the bank borrowed under the ECB’s Longer-Term Refinancing Operations in a “first window” this week, Chairman Josep Oliu told reporters in Barcelona today. Bankinter plans to repay 15 percent of its 9.5 billion euros of LTRO loans this year, Chief Financial Officer Gloria Ortiz said on a webcast today.

The pledges to return ECB loans come as Spanish banks seek to persuade investors that a cleanup of soured property assets and easier access to funding means they have turned the corner. Still, weak credit demand and low interest rates are putting pressure on margins while loan defaults continue to mount as Spain’s economy shrinks.

“Wholesale markets are beginning to open, international investors are showing interest in Spain, exports are doing well,” Bankinter Chief Executive Officer Maria Dolores Dancausa told reporters in Madrid. “There are aspects of the economy that are doing badly but I want to underline the positive.”

Bond Issuances

Spanish banks have issued about 9 billion euros of bonds this year in a sign of easing funding conditions that has bolstered investor confidence. Bankinter shares are up more than 30 percent this year and Sabadell has gained 9 percent.

“There has been a flurry of wholesale funding done at the start of the year and that has been very useful,” Huw Van Steenis, head of European banking analysis at Morgan Stanley, said in a phone interview from Davos, Switzerland, today. “Another aspect is that the banks are deleveraging -- we saw evidence of that with Sabadell and Bankinter.”

Banks this week can start repaying more than 1 trillion euros of three-year money they borrowed in two portions during 2012.

“At the moment, the ECB doesn’t finance any part of the structural balance sheet of the bank, something we couldn’t say a year ago,” Oliu said.

Morgan Stanley said in a Jan. 15 research note that repayment of LTRO loans by banks in southern European countries such as Spain was “likely to be a ‘spectator sport,’” with 10 percent to 20 percent being returned in the first quarter in a base case.

‘Cheaper Source’

“Domestic Spanish banks and others are likely to keep the LTRO fund as a cheaper source of funding as well as a useful insurance policy against sovereign risks,” said the report, whose authors included Van Steenis. Banks in the euro area’s North may return 55 percent of their loans in a base case, it said.

Sabadell earlier reported an 8.73 million-euro fourth-quarter loss compared with profit of 24.47 million euros in the same period a year earlier as it boosted provisions to cover real estate losses. Bad loans as a proportion of total lending jumped to 9.33 percent from 8.46 percent in September.

Fourth-quarter net interest income rose 27 percent to 487.3 million euros from a year earlier. That was a 7.4 percent decline from the third quarter.

The process of normalizing credit conditions in Spain has some way to go, Sabadell’s Oliu said.

Bad Loans

“With all this surge of turbulence we have had over the past four years, first of all confidence was lost in the banks and then the banks lost confidence in companies,” said Oliu. “To re-establish a more normal climate in which the credit market can work, there has to be a return of confidence.”

Sabadell continued to shrink its business in the fourth quarter as assets declined to 161.5 billion euros from 166.5 billion euros in June, the lender said. Bankinter’s assets shrank to 58.2 billion euros from 60.3 billion euros in June.

Bankinter’s fourth-quarter net income climbed to 52.36 million euros from 34.22 million euros a year earlier, the Madrid-based bank said in a filing to regulators today. Net interest income fell 1.7 percent from a year earlier and 16 percent from the third quarter to 146.7 million euros.

Bad loans as a proportion of total lending at Bankinter rose to 4.28 percent from 3.24 percent a year ago, the lender said. The ratio will probably increase by another percentage point over the next year before peaking, Dancausa said.

(Updates with comment from analyst in sixth paragraph.)
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