Spain: savings banks suffer while BBVA and Santander expand

Spain has been a laggard in the search for improving economic fundamentals.  The news coming out of Spain has been dreadful from employment to house prices to mortgages and banking. But the first ray of hope appeared yesterday when it was reported that late payments on loans granted by banks, savings banks and cooperatives fell for the first time in two years.

According to the numbers released by the Bank of Spain the delinquency rate for June 2009 stood at 4.488%, down from May’s 4.563% and the first fall since July 2007.  Mind you, the rate of delinquency is still at levels not seen since 1996.  But this is the first countertrend in the upward march of financial distress for Spanish mortgage holders.

Nevertheless, the news was not all good yesterday.  Edward Hugh reported the same day that twenty percent of Spanish mortgages are now considered high risk.

According to an article which appeared in the Spanish newspaper Expansion this morning, one in five Spanish mortgages is now considered as being high risk and liable to become “non performing”.

The mortgages at greatest risk are naturally those contracted after 2005 where the loan to valuation was over 80% of the total. In 2006 and 2007, according to data from the bank of Spain, LtVs were over 80% in 17.7% of the mortgages granted, since prices are now heading back towards the 2005 level, we can easily conclude that something in the region of one in five Spanish mortgages are now high risk.

Prior to 2006, the main source of data comes from a study by Genworth Financial, who show that loans with +80% LtV rose from 12.2% in 1996 to 26.4% in 2005 (see chart below which comes from Expansion). These loans were especially popular between 2003 and 2006, but then started to decline as the decision of the ECB to raise interest rates made the likelihood of a price correction rise sharply.

It is the Spanish savings banks, the cajas, which are most affected by delinquency and high risk loans. See my April post “Spain’s savings banks may have 40 billion in writedowns.” The big Spanish banks are in a much better capital position.  Just today, it was leaked that BBVA is expected to win a government-run auction for the troubled American lender Guaranty Financial. The FDIC had set a deadline for today for bids.

Both BBVA and Santander have used the credit crisis as an opportunity to strengthen their position internationally. Santander previously bought Sovereign Bancorp in the US and Alliance and Leicester in the UK.  For some time now, BBVA has been making a tactical expansion into the Sun Belt markets in the US, an area with a large Spanish-speaking population.  Obviously, the purchase of Guaranty fits into that strategy.

Santander has a market capitalization of over 80 billion Euros (nearly $120 billion) while BBVA has a market cap over 40 billion Euros (nearly $60 billion). By comparison, only Goldman Sachs, Wells Fargo, JPMorgan Chase and Bank of America are bigger in the U.S., a country with six times the population of Spain. So, these are very international banks of enormous size, well regarded in the capital markets.

So while Spain is a country still beset with problems, especially in the banking sector, there is an extreme dichotomy between the fortunes of the international big banks and the domestic savings banks.


La morosidad del crédito baja en junio por primera vez en casi dos años – Finanzas

  1. Anonymous says

    The real estate crisis in Spain is just beginning, loans in arrears will increase for the following years. As construction means 20% of GDP, growth will be anemic for the next 4 years at least. BBVA will have many problems to solve in Mexico whereas Santander will be impacted by UK. Frankly economic data sucks in Spain and they are dancing on their own titanic’s deck

    1. Edward Harrison says

      Carmelo, I am frankly amazed at how long Santander and BBVa have been able to make it through without showing huge problems. Early in 2008 I expected Santander’s US and UK exposure to reveal more writedowns. This has yet to happen. I also expected BBVA to show more losses in Mexico. Again, nothing here yet.

      There are two interpretations I take away: First, BBVA and Santander were a lot more prudent domestically than the Cajas. Second, there are a lot of toxic assets on BBVA and Santander’s balance sheets that are marked to maturity.

      Only when the actual foreclosure or loss occurs will these assets be written down. This is also true for many of the Cajas as well. So while Santander and BBVA look much better than the Cajas, they likely have more exposure to bad credit in Spain, the UK, US, Argentina and Mexico than we have seen documented to date.

    2. Edward Harrison says

      You may have seen the FT Alphaville post out today that mirrors my concern that BBVA and Santander, along with the rest of Spain, are playing extend and pretend. Here’s the link:

      I may write it up.

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