Despite recent signs of improvement from the property market, the Spanish banking sector still has hundreds of billions of Euro worth of dubious real estate on its books.
The Spanish banking system is still weighed down by €238 billion in dubious real estate assets on balance sheets, according to a recent report by financial consultants Analistas Financieros Internacionales (AFI).
The value of impaired real estate assets is practically 9% of assets in the Spanish banking system, no small amount considering the challenge to improve capital ratios.
With so much dubious real estate still on the books, further provisions of as much as €20 billion are on the cards, warn AFI, which could cause problems as the new Basel III banking regulations come into force over the next few years.
Dodgy real estate has slashed Spanish banking sector returns in half, argue AFI, making it even harder to build up capital ratios and beef up balance sheets. Capital tied up in dubious real estate assets could be better employed in profitable new loans that would help the Spanish economy recover.
However, the challenge of complying with new banking regulations in Basel III is not a strictly Spanish problem, according to the international ratings agency Moody’s, more like a European problem. Banks will have to focus on more selective lending, higher spreads on loans, and higher fees in order to get capital ratios in shape.