Only Spain's largest banks have been able to absorb the losses from the country's troubled real estate sector, which has left the main lenders in a strong position to increase their market share.

When the dust finally settles on the most turbulent financial crisis in Spain’s modern history, the country’s banks will have shrunk in number to about 10, compared with 51 in 2008, according to Ángel Cano, president and chief operating officer of BBVA, Spain’s second largest bank by assets. “Moreover," he says, "Spain will have one of Europe’s healthiest and soundest banking industries, and it will also be very profitable.”     

It seems that following a difficult few years, Spain's largest banks, the few that will survive the crisis, are optimistic about the future of the Spanish banking system. According to Santander’s chairman, Emilio Botín, the restructuring of the Spanish financial system is extremely rigorous and will leave the country with one of the most solid financial systems in the world. “Alongside these reforms," he says, "we are seeing a reorganisation and restructuring of financial systems. Spain’s case is undoubtedly the most intense and will turn it into one of the most solid financial systems in the world.”

Cause for optimism

There is now near unanimity among leading Spanish bankers that the worst of the economic crisis is behind them and that the industry is poised to rebound back to healthy profit growth. “We are confident that the Spanish property market will come back and that our portfolio of unsold real estate will be significantly reduced in the next two to three years,” says Isidro Fainé, chairman of CaixaBank, which recently merged with Banca Cívica to create the largest lender in Spain’s domestic market. “Those who are in the game for the long term will be the winners." he adds. “We have written down our portfolio to a level that few banks in other countries can match.”

Such optimism is further underlined by Carmen Muñoz, a senior director at Fitch Ratings, who believes that Spain's banks should be able to ride out the property market collapse. “The banks face a big challenge in managing their real estate portfolio,” she says. “However, in the economic downturn of the early 1990s a lot of foreclosed property was managed directly by the banks, so they can draw on that experience.”

Ms Muñoz is also bullish on the top banks’ business models and capital strength. “We rate Santander and BBVA one notch above the sovereign and this is supported by their international diversification, their capacity to absorb shocks and the strong performance they have delivered in recent years.”

Out of the woods

This positive attitude extends to Ángel Ron, chairman of Banco Popular, Spain’s sixth biggest lender. "Spain will emerge from this crisis sometime in 2013, with a strongly capitalised banking sector,” he says.

In November 2012, Banco Popular raised €2.5bn in a rights issue to avert the need for a European cash injection. “The rights issue allows us to raise up to €2.5bn, with which we can completely write off all our expected property non-performing loans [NPLs] in the fourth quarter of 2012,” says Mr Ron. “We expect to announce a €2.3bn pre-provision loss for 2012, after which Banco Popular will begin to generate a significant amount of capital, which will yield a profit of more than €500m in 2013 and four times that in 2014, along with the Spanish banking sector’s highest level of net interest income. A radical clean-up of this nature has never before been undertaken in Spain.”

The rights issue was a test of the ability of Spanish banks to tap the markets, and particularly crucial for Popular as it had been hard hit by the bursting property bubble, which dragged the bank into loss. In September 2012, Popular was the largest non-nationalised Spanish entity to fail a stress-test by independent auditor Oliver Wyman. Its net profit for the first three quarters of 2012 fell 38% due to write-downs on property losses.

“We are looking very closely at Popular,” says Ms Muñoz. “According to the stress-test, it will need €3.2bn, which it plans to cover with the rights issue. The bank has a good track record of accessing the capital markets and it is expected that the rights issue will take it out of the woods.”

Provisions plunder profits

None of Spain's big banks escaped the devastation wreaked by the meltdown of the property market which, until 2008, was the engine of Spain’s robust economic growth. The Spanish residential property bubble saw real estate prices rise 200% between 1996 and 2007. Property prices have fallen about 30% since peaking in 2007, but analysts believe they could decline by that much again over the next two years. Home ownership in Spain is more than 80%, the highest level in the world along with Singapore.

When the bubble burst, Spain’s construction industry registered the sharpest decline of any European country. The knock-on effect on the banks was inevitable: several of the large banks saw their credit ratings downgraded, some to junk status. The country’s largest mortgage lender, Bankia, was nationalised in May 2012 and later announced it would require a bailout of €23.5bn to cover losses from non-performing mortgages.

In mid-2012 the Spanish government, in an attempt to clean up the troubled property assets held by many of the country's banks, ordered an independent re-evaluation of the loans made during the property boom. This forced banks to set aside hefty provisions, which meant that even the largest banks recorded loses in the first half of 2012. 

Santander saw its attributable net profit plummet 66% to €1.8bn in the first nine months of 2012, after having to set aside more than €5bn to cover its Spanish real estate exposure and €9.5bn across the group for NPLs. With these provisions, Santander covered 90% of the requirements announced in mid-2012. Pre-provision profit was up 3% to €18.1bn.

“The bank’s capacity to generate profit enabled us to set aside hefty real estate provisions in Spain in 2012 and significantly increase NPL coverage,” says Mr Botín at Santander.

BBVA’s net attributable income fell 47% to €1.7bn in the nine months to September 2012, after completing two-thirds of the provisions required for Spanish property exposure, while in the same period operating income increased by 16% to €9bn. Mr Cano says the underlying figures reflect what he defines as “a comprehensive and balanced management of the four fundamental levers of banking: earnings, risks, capital adequacy and liquidity”.

BBVA’s third-quarter results incorporated Catalan savings bank Unnim Banc, which BBVA acquired in March 2012 for a symbolic €1. Unnim, itself a merger of three small cajas based in Catalonia, had been put up for sale by the Bank of Spain after being taken over by the regulator in September 2011. BBVA took over the savings bank in competition with rivals Santander and Popular, in what is seen as a part of the gradual absorption of the loss-making cajas by larger retail lenders.

Foreign growth

A strategy of international diversification helped both Santander and BBVA to buffer the impact of their losses from the Spanish property market collapse. Santander derives only 16% of its recurring attributable profit from the Spanish market, which enabled it to offset the damage done by the collapse of the property market with healthy revenue growth in emerging Latin American economies such as Mexico, Brazil and Chile. In the first three quarters of 2012, Latin America accounted for 50% of the group's profits, while the UK and US accounted for 22% between them, and another 12% came from continental Europe outside Spain.

BBVA also has a strong presence in Latin America, primarily in the Mexican market, which saw net interest income rise nearly 9% in the first three quarters of 2012. The bank’s Latin American franchise, excluding Mexico, grew its net interest income 26% in the same period, while Eurasia was up 16%. The US business yielded an improvement in the deposit based and in credit quality.

“Part of our strategy is to create group branches in hubs and to focus on introducing new technology," says Mr Cano. "We have therefore been able to cut our branch network in Spain to 3000 offices, a reduction of 600 over the past six years. On the other hand, we envisage growing the network in Latin America and the US, where we can still reap benefits from branch penetration. BBVA has emerged as one of the strongest and the best capitalised banks of the sector. This allows us to manage our funding costs more effectively, in part benefiting from a flight to quality. As a result, our costs stand at about 60 basis points below those of our competitors.”

Vulnerable positions

Popular and CaixaBank, on the other hand, maintain a comparatively light footprint outside the domestic Spanish market and have therefore found themselves more vulnerable to the property sector meltdown. Popular is looking at the possibility of expanding its franchise in Florida in the US, but its strategy remains focused on organic  growth in Spain.

“Popular is different from other major banks in that it is the only fully retail bank of the major players,” says Mr Ron. “We expect to reap significant benefits from this focus on the small and medium-sized enterprise sector, which accounts for 41% of our loan portfolio. This places us closer than our competitors to the productive sector and enables us to enjoy a 41% cost-to-income ratio, the lowest in Europe.”

CaixaBank’s Mr Fainé says the group’s activity abroad is focused on markets such as Latin America, Asia and central Europe. “In Mexico we have a solid working relationship with Carlos Slim [a Mexican business magnate] and a 20% holding in [financial services company] Inbursa, with plans to extend our business across Latin America,” he says. “We are also the largest shareholder in Hong Kong’s Bank of East Asia, and we hold 10.1% of Erste Bank in Austria. We have developed a different strategy to our Spanish competitors in these markets by forming relationships with well-established, solid partners. I would prefer to have 20% of the Mexican market with Mr Slim than to have 80% and go it alone.”

CaixaBank’s net attributable profit fell by 80% to €173m in the first three quarters of 2012, after provisioning charges and a write-down of €8.4bn, meeting 78% of government requirements. Like its rivals, CaixaBank turned in a solid underlying performance, with a 17% increase in net operating income to €2.6bn. “Given the exceptional nature of this year,” says Mr Fainé, “our priority has been to reinforce the strength of the balance sheet, protect future results, consolidate our solvency, which has been independently validated by the Oliver Wyman stress-tests, and drive up liquidity, an aspect that remains a cornerstone of our strong balance sheet.”

Banco Popular reported pre-provisioning profit of €1.6bn for January to September, up 31% year on year. Net interest income increased 35% in the same period to €2.1bn. Popular posted a 37% decline to €251m in net attributable income.

Government response

The centre-right government of prime minister Mariano Rajoy responded to the banking crisis by creating Sareb, a 'bad bank' that will commence operations this month and which will buy up billions of euros-worth of distressed loans and foreclosed property from commercial lenders for about half of their book value. Sareb was set up as a condition of Spain receiving up to €100bn in European aid for its troubled banks. 

Sareb will apply an average 63% discount on land and housing units and an average 46% discount on property loans, selling the assets to investors over the next 15 years. By February 2013, Sareb wants to have about €500m from foreign investors, which the government hopes will be attracted by low asset prices. The bad bank has started with €5bn in equity, including €1bn in capital and €4bn in subordinated debt.

BBVA has taken things into its own hands, setting up BBVA Real Estate to manage the bank’s current as well as possible future property assets. “Over the past year, [the bank has] speeded up the sale of properties," says Mr Cano. "Now with discounts of about 25%, average quarterly sales have increased 66% from a year earlier.”

The clean up of Spain's real estate assets is not complete yet, but there are signs that, for the largest banks at least, things are improving. It is expected that there will be another round of consolidation, which would further benefit the two biggest lenders, Santander and BBVA, giving them a market share of close to 20% each. The takeover spree is likely to start in 2013 and some of the main candidates seen to be on the block are distressed lenders Caixa Catalunya, Banco de Valencia and NovaGalicia Banc, along with a few of the smaller cajas. Along with CaixaBank, the big three are likely to end up with 50% to 60% of the Spanish market, according to Fitch’s Ms Muñoz.


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter