Deposit institutions will be confronted by the end of September to further provisioning to cover hidden risks stemming from refinancing. It seems too early to float the foreseeable resources to be put aside for such an exercise. While solid groups will overcome largely unscathed these new ordeal, ailing entities might be forced to indulge in heavy selling of assets to make up for the stiff requirements.
Later on they are bound to undertake the stress test launched by the European Banking Authority. A less unpalatable trial even if the Basel III capital ratios are for more stringent than the notion of principle capital used by the Spanish supervisory authorities. After all, stress tests are supposed to picture a doomsday scenario only to conclude that the vast majority of banks can cope with it.
The real challenge will materialize when the ECB undertakes an in-depth examination of the balance sheets, as the pre-requirement for taking over supervision tasks across Europe. The central bank will make sure to list all impaired assets stemming from the past. If only to avoid any responsibility on such dubious heritage.
Spanish banks seem ill-equipped for such an obstacle race. Their bad loan ratio has hit another record and brands currently at 11.7%. A figure bound to increase next year propelled by the twin pressure of sluggish growth and a marked squeeze in the credit portfolio. Profits are plummeting and provide little comfort in harnessing solvency. The first quarter of this year witnessed a 50 million all time low level in benefits before taxes. Lack of resources proves particularly unwelcome when confronted with fat provisioning needs.
But the most worrying fact is the lack of ambition in performing a much needed restructuring.
The process of handing over the nationalized entities to solid and solvent financial groups seems hopelessly slow, as government bet for too long on making a better deal by postponing the sale. The reduction in manpower and in the number of branches scattered across the country runs behind the schedule and doesn’t solve the massive supply excess.
Thus, the Spanish banking system appears as most vulnerable should it face a new bout of financial instability. Most of its business is made up by residential mortgages that fail to provide a fair return as the Euribor rates have fallen to historic lows. Business has switched to sovereign debt, a most risky investment should interest rates start an upswing movement next year. These shortcomings would be swiftly bridged as soon as a solid recovery is in sight. But such a prospect will most certainly fail to materialize in the short run, thus putting an extra pressure on credit institutions. They are likely to face fresh trouble ahead.