Spanish Banks Lead European Falls on Loan Quality Concern

Spanish and Italian banks led declines for shares in Europe after data for bad loans revived concern over asset quality and speculation increased that the Federal Reserve will cut bond purchases.

Banco Popular Espanol SA, Spain’s sixth-biggest bank, slid 9.3 percent to 3.56 euros at 12:53 p.m. in Madrid, the biggest drop since November and the most on Europe’s Stoxx 600 Banks Index, which lost 2.2 percent. Italy’s Banco Popolare di Sondrio Scrl fell 4.1 percent to 4.12 euros.

“There was quite a lot of good news coming out of the peripheral countries and then yesterday we got a reality check,” Peter Braendle, who manages about 500 million Swiss francs ($543.4 million) at Swisscanto Asset Management AG in Zurich, including shares of Spain's Bankinter SA and Unicredit SpA in Italy, said in a phone interview. “The news on bad loans in Spain is that not everything is over and that the problems facing the banks are ongoing.”

Economic slumps in Spain and Italy mean more companies and consumers are falling into default, hurting profit at banks as they set aside more provisions to cover the losses. Weak economies in southern Europe are fuelling pessimism in markets already concerned that the Fed, which will publish minutes of its July meeting tomorrow, will start withdrawing stimulus.

Spanish non-performing loans accounted for a record 11.6 percent of total lending in June compared with 9.7 percent a year previously and 11.2 percent in May, the Bank of Spain said yesterday.

Banco Santander SA, Spain’s biggest bank, said last month its bad loan ratio climbed to 5.2 percent of total loans from 4.8 percent in March. Second quarter profit at Intesa Sanpaolo SpA, Italy’s second-biggest bank, slumped after non-performing loans rose about 30 percent from a year earlier.

Benefits of more bond purchases by the Fed “are likely to be negligible” as U.S. inflation picks up, Richmond Fed President Jeffrey Lacker said in interview in Richmond Times-Dispatch newspaper on Aug. 18.

Fed policy makers led by Chairman Ben S. Bernanke are contemplating how to end a third round of quantitative easing that has swelled the Fed’s balance sheet to a record $3.65 trillion.

-- Editors: Mark Bentley, Dylan Griffiths

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