Photographer: Angel Navarrete/Bloomberg

Spanish Banks Surge as Fears Subside Over EU Mortgage Ruling

  • Refunds can be limited to extra interest from 2013: court aide
  • Top EU court will rule in coming months on mortgage case

Spanish banks such as Banco Popular Espanol SA surged after an aide to the European Union’s top court said they may avoid having to refund billions of euros to customers who paid too much interest on home loans before a 2013 ruling on so-called mortgage floors.

Spain is entitled to apply the time limit due to the “macroeconomic issues associated with the scale” of the unfair mortgage terms, Advocate General Paolo Mengozzi of the EU Court of Justice said in a non-binding opinion Wednesday. The Luxembourg-based EU tribunal follows such advice in a majority of cases.

A Madrid court in April already ordered about 40 lenders, including CaixaBank SA, to refund borrowers for the extra interest they paid on mortgages since May 2013, when Spain’s Supreme Court ruled against the so-called floors that prevented borrowing costs from falling in line with benchmark rates.

If the EU court agrees with Mengozzi, lenders would avoid having to give retroactive refunds to customers for interest payments prior to the Spanish ruling.

‘Certainly a Positive’

“Removing some of the uncertainty around this issue is certainly a positive. We now have to wait for the definitive ruling,” Daragh Quinn, an analyst at Keefe Bruyette & Woods, said by phone.

Banco Popular rose as much as 8.3 percent, erasing earlier losses of as much as 3.1 percent and were trading up 5.4 percent at 1.32 euros at 12.40 p.m. in Madrid, leading gains among the members of the Spanish Ibex 35 Index. Banco Sabadell SA shares rose as much as 8.6 percent and Liberbank SA climbed as much as 17 percent.

The EU court case comes as Spanish banks are grappling with margins being squeezed by low interest rates, weak demand for credit and tough domestic competition. Spanish banks would have to return about 4.5 billion euros ($5 billion) should they have to pay back excess and will stop earning up to 6.2 billion euros in the next four years, Madrid-based consultancy company Analistas Financieros Internacionales estimated in a report.

‘Negative Scenario’

"Full retroactivity is the worst negative scenario for banks, although it is not disastrous and can be manageable,” Fabio Mostacci, an analyst at Mirabaud Securities, said by phone before the EU court opinion. “Most banks have already made enough provisions to cover for damages up to 2013 and some banks have an agreement with clients that they will not seek further compensation.”

Banco Sabadell welcomed the opinion, saying in a statement that it is convinced the floor clauses in its mortgages are transparent and that clients were properly informed of them.

For those who did overpay on their loans, a ruling in favor of Wednesday’s advisory opinion would be “bad news” and would add to the Brexit referendum gloom of many British owners of homes in Spain.

The opinion “is a defeat for the common man and will badly affect many of the estimated 500,000 British citizens who own property in Spain -- it is entirely unreasonable and unfair to put a limit on retroactivity,” said Leon Fernando Del Canto, a lawyer at Del Canto Chambers.

BBVA Exposed

Banco Bilbao Vizcaya Argentaria SA is the most exposed in absolute terms to a possible extension of the retroactivity of mortgage floor as it would have to make 1.8 billion euros of new provisions, Goldman Sachs Group Inc. analysts Jose Abad and Izabel Cameron said in a note to clients earlier this month. Goldman Sachs sees net income impact of up to 36 percent in 2016 for BBVA and CaixaBank.

Abad and Cameron said in a note Wednesday that Mengozzi’s opinion “is a positive surprise.”

Most of Spain’s 526 billion euros of home loans are pegged to the 12 month-euro interbank offered rate, or Euribor, according to the Bank of Spain, which estimated that as of 2009 a third of Spanish mortgages had a minimum or maximum interest rate attached to them. As the benchmark plunged from 5.39 percent in 2008 to a record low of minus 0.013 percent in May, clients with floors didn’t benefit.

Lenders including CaixaBank and Banco Popular have removed the limits in their mortgage contracts and have provisioned for legal risks linked to the possible elimination of the clauses. CaixaBank said last week it estimates it would have to provision an extra 750 million euros to cover for possible impacts if retroactivity is granted. It has already provisioned 515 million euros.

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

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