How Much Will Spanish Borrowers Pay Back to the Banks?

Spanish banks will be back in the limelight tomorrow, when the two auditors charged with assessing the capital needs of Spain’s banks, Oliver Wyman Ltd. and Roland Berger Strategy Consultants, are expected to publish the conclusion of their stress tests.

The two reference points for the banks’ capital needs were set by the International Monetary Fund, which earlier this month estimated Spanish banks would need to raise about 40 billion euros, and by the Spanish government itself, which requested as much as 100 billion euros from Europe on June 9 to bailout the country’s banks. Alarm bells will start ringing if the tests show banks need more than that.

In the meantime, forecasts in the Spanish press have focused on the middle of the IMF/government range. El Pais says “the market has already priced in a need for the overall banking system of between 60 billion euros and 70 billion euros.” Cinco Dias says the capital requirement may reach 70 billion euros and increase from there.

Fitch Ratings’ thoughts are there abouts as well. Spanish banks need as much as 60 billion euros in a “base case” scenario, Fitch said when it downgraded 18 of the country’s lenders on June 12. Separately, JPMorgan Chase & Co. economist David Mackie wrote in a May 30 report that banks would require 75 billion euros, part of a 350 billion-euro bailout package for the country. Robert Peston has had a stab, forecasting banks will need 85 billion euros.

The key element that everyone will be looking for in tomorrow’s report is how they treat the loans on the banks’ books. The latest numbers suggest they shouldn’t be lenient. Bad loans as a proportion of Spanish banks’ total lending jumped to 8.72 percent in April, the Bank of Spain said on June 18. That is the highest since 1994, and compares with 8.37 percent in March and 6.36 percent a year ago, as 4.8 billion euros of credit soured in the month, Charles Penty and Simone Meier report.

The bad-loans ratio on consumer loans rose to 7.43 percent in March from 6.86 percent in December and to 3.01 percent for mortgages from 2.74 percent, the Spanish central bank said.

Andrea Filtri, an analyst at Mediobanca Securities in London said the bad-loans ratio “has to go into double digits, and there’s no point in denying that fact at this stage.”

Investors will be looking to see if the bank stress tests make that assumption.

The latest data from Italy may serve by way of comparison. Italian lenders face a similar problem to their Spanish counterparts as bad loans increase amid the country’s third recession in a decade, Sonia Sirletti and Francesca Cinelli report. Banks in Italy are struggling to boost their capital levels after bad loans as a proportion of total lending jumped to 5.4 percent in March, up from 3 percent in June 2008, according to Italian Banking Association data.

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