For the first time since the Spanish property crash unfolded Spanish banks managed to reduced their overall exposure to impaired real estate assets last year. A recent article in the Spanish daily El Pais explains the significance of this.
Translation and adaptation of an article published by EL PAIS
The Spanish property market bubble was to a large extent a credit bubble. The excesses committed during the years of euphoria gave way to a severe economic and financial crisis, which forced Spain to ask its European partners for a bailout to refloat a large part of its banking system, especially the smaller cajas – or savings banks. The biggest banks were far from blameless, but their greater diversification, ability to raise private capital, and more professional management, reduced the damage. Even so, the healthiest banks still needed to undergo a long and expensive clean up that is still playing out. But finally, as this process ran into 2014, listed banks managed to reduce their impaired real estate asset exposure last year for the first time since the crisis started, according to data in their recently published annual reports.
The seven banks listed on the Spanish stock exchange Ibex 35 (Santander, BBVA, Caixabank, Bankia, Sabadell, Popular and Bankinter) ended last year with a total of €125,000 million in delinquent and subprime credit lent to developers, plus properties, land and other property assets that have been repossessed. That is €7,000 million below the previous year in gross figures. If the level of provisions is taken into account, the as-yet-uncovered toxic-risk has gone down to slightly to under €65,000 million, a decrease of some €4,000 million in a year.
However, the decrease in toxic assets corresponds solely to credit, while the property assets in the hands of the banks (properties, developments, land and shares in estate agencies) is still going up, despite the fact that financial institutions have increased their rates of property sales. Banks still embargo, repossess, or are forced to accept the keys to more properties than they manage to sell each year.
So the credit bubble and bust is turning full circle. Exposure to developer loans is gradually diminishing, from €86,179 million to €68,086 million last year. Furthermore, healthy developer loans are also falling, with only €18 billion outstanding, a quarter of the total. Much of the credit extended in the boom went from healthy to impaired to delinquent, and finally to bad debt written off, whilst real estate assets are repossessed.
In 2013, only healthy performing loans went down, while doubtful and repossessed assets went up, meaning toxic assets increased. But in 2014, bad debts fell so hard that, although the number of home repossessions increased, the overall exposure to real estate assets defined as “potentially problematic” by the Bank of Spain, went down for the first time since the crisis began. Until then, the only reduction in toxic assets (or rather transfer) in nationalised banks had taken place when the developer risk was passed to Sareb, the ‘bad bank’.
Among property assets, the largest increase has taken place in land – the asset that is most difficult to sell. Banks have made provision for around 60 per cent of original values, but some land assets have lost so much value that banks would still be forced to sell at a loss. There’s little demand for land, transactions are relatively scarce, and land is still being repossessed from developers unable to pay their loans. This explains why land in the hands of the seven listed banks reached a record gross amount of €28,127 million at the end of 2014, €2,500 more than at the end of 2013. Faced with the difficulty of finding developers to buy this land for construction, banks are starting to share the risk with them in exchange for providing the land.
Home Repossessions Still Rising
Indebted homeowners are still struggling, and foreclosures continue to rise, up to €14,161 million. This is mostly due to the long process of repossessions. Foreclosure procedures started during the worst of the crisis years are now coming to an end, despite the fact that new mortgage default appear to have bottomed out.
Some banks have done better than others in avoiding the Spanish property crash. In top position is Bankinter, the only one of the seven who avoided the property bubble temptation. Its involvement in the sector was extremely small and it has hardly any debt default or repossessed properties. In second place is Bankia, although in this case the clean slate on its balance sheet is thanks to a bailout that allowed it to dump most of its toxic assets on the Sareb “Bad Bank”.
Among the largest banks, the one that has cleaned up its risk most is the Santander. Its toxic property assets only amount to 15.3 per cent of its credit investment in the private sector in Spain, and merely 1.5 per cent of its consolidated assets. One step behind are Caixabank and the BBVA. Caixabank has the largest provisions, and the BBVA has the advantage of its international diversification.
Banco Sabadell is a special case. It appears to have high exposure to toxic risks, but a significant part of these are covered by an asset protection scheme acquired through the purchase of CAM bank.
The bank needing the largest cleanup is Banco Popular. Despite boosting the sale of its repossessed properties, it’s still the bank with the most toxic assets, and the least hedging.
Spanish Property Insight adapts and translates selected articles from the local press for the benefit of non-Spanish speakers.
This adaptation and translation is based on the following article (in Spanish): La banca rebaja por primera vez los activos tóxicos del ladrillo.