Moody’s still negative on Spanish banks
Posted by
Stacy-Marie Ishmael on Oct 13 16:37.
It’s pretty much the done thing these days to question the fundamentals of the Spanish banking system, but — and it surprises us to say this — Moody’s has been ahead of many (though not
the FT) in warning about the pain in Spain.
In May, Lisa Hintz of Moody’s Capital Markets Research Group, a separate unit from the main ratings division — issued the following
warning:
As Spain continues to weaken, we believe there is a non-trivial possibility of a systemic shock to the Spanish banking market, most likely from a large failure of a covered bond issuer. Banco Sabadell, which is currently trading at a CDS-implied rating of Ba1 and a gap of -7, is a candidate.
A week later, Moody’s rating unit said it would be
reviewing the bank financial strength ratings (BFSRs) of 36 Spanish banks for possible downgrades. The actual
downgrades followed in June, with cuts to the senior unsecured debt and deposit ratings of 25 of Spain’s banks, and reductions in the BFSRs of 30.
And Moody’s continues to keep a close eye on the country’s financial institutions, as its latest report — published on Tuesday — makes clear. Emphasis FT Alphaville’s:
The fundamental credit outlook for the Spanish banking system remains negative, reflecting the impact of the ongoing economic recession and severe asset quality deterioration on domestic banks’ risk absorption capacity
“Over the past 12 months, the pressure on Spanish banks has broadened, resulting in: (i) an accelerated deterioration of asset quality; (ii) a further weakening of the existing cushions against losses, such as retained earnings, generic (anti-cyclical) provisions and unrealised capital gains; and (iii) a still challenging wholesale funding market and increased competitive pressure on the retail funding side,” says Maria Cabanyes, Moody’s lead analyst for the Spanish banking system.
On the face of it, Spanish banks have so far demonstrated remarkable resilience to these pressures, but Moody’s remains concerned that many entities appear to be avoiding recognition of the true scale of the asset quality deterioration in their books, which could result in the banking sector remaining weak (and in continuing low standalone ratings) unless this is addressed more decisively.
That latter paragraph struck us as particularly interesting, not least because of the
theories,
counter-theories and
analyses on the small matter of whether Spain’s banks are
hiding their losses.
It’s not all bad news, however:
. . . the amount targeted by the government to support the banking sector (close to €100 billion has been made available in a recapitalisation and restructuring fund) should provide sufficient funds to address the capital shortfalls of Spanish banks under Moody’s base scenario, thereby supporting the current long-term ratings.
Except for this bit:
Extrapolating Moody’s estimates of lifetime loan losses for rated banks in Spain to the entire Spanish financial institutions universe results in an approximate figure of EUR108 billion of losses under the rating agency’s base-case scenario, as of the end of 2008. Against this estimated loss number, system-wide (general and specific) loan loss provisions amounted to EUR51 billion at the end of H1 2009, which means that constituted provisions provide a coverage of expected losses of 47%.
And this one:
This in turn means that Spanish banks still need to fund provisions of EUR57 billion on the basis of Moody’s assumptions regarding the performance of key asset classes, earnings and available capital. Extrapolating the net loan loss provision cushions that have been built-up over the past six months (EUR6.3 billion),
it would take banks close to five years to fully provision Moody’s estimation of losses. This would severely affect the capacity of many Spanish banks to generate profits in the coming years. Should the Spanish economy continue to deteriorate significantly, the rating agency’s stressed scenario estimates substantially higher losses, of up to EUR225 billion.
And for completeness, some edifying charts:
Source: StockCharts.com
Source: StockCharts.com
Source: StockCharts.com
Source: StockCharts.com
