Caixa Bad Loans Drop in Sign Spain Housing Impact Abating

Two Spanish lenders said today their bad loan ratios fell in the first quarter, adding to evidence that the damage to bank balance sheets from a six-year economic slump is fading.

CaixaBank SA, Spain’s third-biggest bank, said its proportion of non-performing loans to total lending dipped to 11.36 percent in the first quarter from 11.66 percent in December, the first time decline since the end of 2006. Banco Sabadell SA, the country’s fifth-biggest bank, said today its ratio slipped to 13.57 percent from 13.63 percent.

The results, accompanying first-quarter earnings, add to evidence that the effects of the property crisis that caused 184 billion euros ($254 billion) of loans to sour since the end of 2006 may be in decline. Investors still need to be cautious about calling a definitive change in the trend for bad debt at least until they know the outcome of a European Central Bank review of continent-wide banking assets, said Andrea Filtri, an analyst at Mediobanca SpA.

“The peak to bad loans is close but I’m not sure the moment has yet arrived where we can say it’s now behind us,” he said in a telephone interview from London. “The improvement is still positive news.”

Spanish non-performing loans fell to 13.7 percent in February from 13.8 percent in January on a like-for-like basis, the Bank of Spain said this week. The stock of bad loans fell for a second month, dipping to 195.1 billion euros from 197.2 billion euros in January.

“We think it’s a change in the trend,” said Jaime Guardiola, Sabadell’s chief executive officer, in a news conference in Barcelona today, referring to the bank’s debt data. “Each quarter we will keep giving good news.”

The ECB has placed special focus on mortgages as it conducts the review, to be completed before it takes over as Europe’s banking regulator in November. The ECB is seeking to determine whether banks are underestimating the amount of sour loans on their balance sheets and need to raise capital.

CaixaBank’s loans newly classified as in default dropped 52 percent compared with the fourth quarter, the bank said in a filing to regulators today. Its stock of “dubious” assets dipped by 1.4 billion euros in the first quarter, the lender said.

While its bad loans ratio dipped in the period, Sabadell’s earnings continued to show the stresses on its asset quality caused by a Spanish economic slump that lasted six years. The bank said in a filing to regulators today that it booked an 811 million-euro one-time charge in the first quarter as it continues to recognize impairments to real estate and loans.

“It’s definitely positive that there are signs that NPLs are peaking,” said Benjie Creelan-Sandford, an analyst at Macquarie Inc. in London, in a phone interview. “The question now is how provisions will trend and how quickly these charges will normalize.”

Banco Popular Espanol SA, a lender forced into an emergency share sale in 2012 to avoid a state bailout as loan losses mounted, witnessed a “radical” change in its asset quality trends in the early part of this year, Chairman Angel Ron said in an interview in March.

Exceeding Estimates

CaixaBank’s first-quarter net income beat expectations, falling 55 percent from a year ago to 152 million euros. That compared with the 140 million-euro average estimate in a Bloomberg survey of seven analysts. Earnings in the same period of 2013 were boosted by one-time gains related to the purchase of nationalized lender Banco de Valencia SA.

Sabadell said first-quarter profit rose to 81.2 million euros from 51.1 million euros in the first quarter of last year as net interest income climbed 17 percent to 530 million euros.

Sabadell rose 2.7 percent to 2.44 euros at 2:52 p.m. in Madrid, the highest level since December 2011. CaixaBank lost 0.7 percent to 4.56 euros, falling for a second day.

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