Spain's banks raise record loans

Madrid  Spain's lenders are pledging some of their best assets to raise record levels of secured funding, including from the European Central Bank, eroding creditor safeguards at the same time the government is planning the country's largest bank bailout.

Borrowing from the ECB rose 50 per cent in March from the prior month to €227.6 billion. Bankia Group is among lenders that increased mortgage-backed debt issuance by 35 per cent since December 2007 to €535.1 billion (Dh2.5 trillion), or 53 per cent of their real-estate loans, according to Spanish Mortgage Association data at the end of 2011. Rodrigo Rato, Bankia chairman, stepped down this week as part of a plan in which the government is willing to inject public funds.

Spanish lenders are increasingly depending on the central bank and secured debt sales to lower funding costs after their return on equity in 2011 was the lowest in more than four decades following the country's real-estate crash. The ECB provides loans at rates of 1 per cent against collateral such as covered bonds and mortgage-backed securities, which would be used to repay the debt in an event of a default, leaving fewer assets available to unsecured creditors, including depositors.

Lower recovery levels

"Banks strongly relying on ECB funding and secured bonds are actually subordinating other creditors in the event of a bank insolvency, so recovery levels would be lower," said Helene Heberlein, managing director for covered bonds at Fitch Ratings. "The asset encumbrance is especially worrying from the point of view of banking authorities" when the "issuers are also deposit-taking institutions."

The Spanish banking industry's interest margin, or the difference between what they earn on loans and the cost of funding, fell about 20 per cent since July 2007 to 0.86 percentage points at the end of last year, the lowest since at least 1970, when the Bank of Spain started to compile the data.

Return on equity was negative at the end of 2011, the first time since at least 1985, as unemployment soared above 20 per cent to the highest rate in the euro region and provisions against losses on real-estate debt rose.

The seven major banks, including Banco Santander, Banco Bilbao Vizcaya Argentaria and Bankia Group, which was formed in 2010 from a merger of seven savings banks to become the country's third-largest lender, will need €68 billion of additional capital as a buffer against bad loans and to comply with increasing regulatory requirements, according to a May 9 report from Royal Bank of Scotland Group Plc.

Spain's government will make banks set aside more to cover property loans that are still being paid to bolster confidence in the financial industry. The rules, to be approved at a Cabinet meeting tomorrow, may create additional provisions of about €30 billion, said a person with knowledge of the situation, who declined to be identified because the new rules aren't public.