San Francisco: Spain’s banks face a capital shortfall that could climb to €105 billion (Dh495.87 billion), almost double the estimate the government provided last week, according to Moody’s Investors Service.
The nation’s lenders may need infusions of €70 billion to €105 billion to absorb losses and still keep capital ratios above thresholds outlined in legislation last year, Moody’s analysts wrote on Monday in a report. That compares with the €53.7 billion shortfall found last week after officials commissioned a stress test designed to lift doubts about the financial industry’s ability to withstand losses.
“The recapitalisation amounts published by Spain are below what we estimate are needed for Spanish banks to maintain stability in our adverse and highly adverse scenarios,” the analysts, Maria Jose Mori and Alberto Postigo, said in the report. “If market participants are sceptical about the stress test, negative sentiment could undercut the government’s efforts to fully restore confidence in the solvency of Spanish banks.”
Spain announced the results of the test, conducted by management consulting firm Oliver Wyman, after commissioning the review of 14 lenders as part of terms to win a European bailout of as much as €100 billion for its banks. Lenders suffered more than €180 billion of losses linked to souring real estate loans. The government ordered banks in February and May to recognise €84 billion of losses on real estate assets.
The €53.7 billion figure takes into account mergers under way and deferred tax assets, the Bank of Spain and Economy Ministry said in a statement on Friday. Without those effects, the shortfall climbs to €59.3 billion, according to the statement. The estimate is less than the €62 billion shortfall found by Oliver Wyman in June.
Demonstrating lenders’ ability to withstand an extreme scenario — a three-year economic contraction — is part of the government’s drive to show it’s fixing the economy while debating whether to seek another rescue package.
While many assumptions in the stress test were conservative, some may be questioned, Moody’s said. The test used a 6 per cent core capital ratio under a stressed scenario, while the ratings firm assumed capital ratios of 8 per cent to 10 per cent, according to the report. The rate used by Ireland for its test, including a buffer, was 9 per cent.
The review showed no deficit for seven Spanish lenders, including Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and Banco Sabadell SA. The Bankia group, a nationalised lender, had a €24.7 billion deficit and Banco Popular Espanol SA had a €3.22 billion shortfall. Banco Popular slid more than 6 per cent on Monday after the firm said it will seek to raise as much as €2.5 billion from a stock sale and suspend its October dividend.
The stress tests analysed 36 million loans and 8 million guarantees, using information from the databases of lenders and the Bank of Spain, according to the statement. A team of more than 400 auditors verified the quality of loans by examining 115,000 loan operations.
Even as Moody’s expressed concerns that the government underestimated the banks’ capital needs, a recapitalisation is still “intrinsically credit positive” for all of the nation’s lenders since it would involve more capital and more banks than earlier efforts, the ratings firm said.