Spanish Banks Lose EU Case on Mortgage Interest Repayments

  • EU court ruling concerns ‘mortgage floors’ on Spanish loans
  • Threat of retroactive repayments weighed on banking industry

Spanish Banks May Owe Billions to Mortgage Customers

Spanish banks, including Banco Popular Espanol SA and Banco Bilbao Vizcaya Argentaria SA, may have to give back billions of euros to mortgage customers after a final ruling by the European Union’s top court. Bank shares tumbled by as much as 10 percent.

Borrowers who paid too much interest on home loans pre-dating a May 2013 Spanish ruling on so-called mortgage floors are entitled to a refund from their banks, judges at the EU Court of Justice ruled in Luxembourg Wednesday.

The court said that a proposed time limit on the refunds is illegal and customers shouldn’t be bound by such unfair terms. Banco Sabadell SA fell as much as 7.5 percent, while Banco Popular slipped as much as 10.5 percent, the largest decliner in Spain’s Ibex 35 benchmark.

"This comes as a surprise and in a bad moment for Spanish banks as most of them would have to make extra provisions to pay for this,” Daragh Quinn, an analyst at Keefe Bruyette & Woods, said by phone. "It will mean pressure on capital generation and profits in the fourth quarter."

The EU court case comes as Spanish banks are under pressure from low interest rates and weak demand for credit, affecting their traditional business of lending. With 521 billion euros, home loans are one of the largest parts of Spanish bank lending business as they grew their real estate exposure during a construction boom in the country that burst at the end of the last decade. Some banks are still making provisions for bad loans, which also adds pressure to profit.

BBVA estimated in July that the maximum impact from a negative ruling would be 1.2 billion euros, while CaixaBank SA said at the time it would have to refund homeowners as much as 1.25 billion euros. CaixaBank has already provisioned 515 million euros, it said.

The capital ratios of smaller lender Liberbank SA and CaixaBank will be hit hardest by the ruling, brokerage firm Renta 4 said in a note to clients Wednesday. Liberbank will see a 75 basis points impact on its CET1 ratio, while CaixaBank will suffer a 40 basis points hit. Banco Popular will have a 36 basis points impact.

The ruling doesn’t affect the solvency of Spanish banks nor the strength of the mortgage market in the country, Spanish banking association CECA said in a statement. The Bank of Spain estimates the maximum amount of mortgage floors affected by the ruling is slightly above 4 billion euros, an official said.

Full Retro-Activity

The lingering threat of full retro-activity has weighed on Spanish lenders ever since the nation’s Supreme Court outlawed the mortgage terms that prevented borrowing costs from falling in line with benchmark rates. In April, a Madrid court already ordered about 40 lenders, including CaixaBank, to reimburse borrowers for the extra interest they paid since the Supreme Court’s May 2013 decision.

Banco Sabadell isn’t affected by this ruling and the bank considers its clauses were legal and transparent to clients, a spokesman for the bank said by phone. The bank has been renegotiating some of its clauses and has made provisions, he said.

The ruling doesn’t affect Banco Popular’s solvency or strength, a spokeswoman for the lender said. The total impact of the ruling for the bank is 639 million euros and the bank has already provisioned to cover 305 million euros, she said. Officials for BBVA and CaixaBank didn’t have an immediate comment. Banco Santander SA, Spain’s largest lender, isn’t affected by this ruling as it didn’t use floors in it’s mortgage contracts.

The EU court ruling is at odds with an adviser to the EU tribunal, who said earlier this year that Spain is entitled to apply the time limit due to the “macroeconomic issues associated with the scale” of the unfair mortgage terms.

EU judges ruled that the time limit unfairly deprives Spanish consumers of the right to seek repayment of what they overpaid to the banks.

Most of Spain’s 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 0.074 percent in November, clients with mortgage floors didn’t benefit.

The cases are: C-154/15, Gutierrez Naranjo, C-307/15, Palacios Martinez, C-308/15, Banco Popular Espanol.

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