Spanish banks’ exposure to bricks and mortar is still worrying

Spain’s banks currently have on their books something close to 213 billion euros in property risks (assets and loans). Is that a lot or not? Judging by the recent reports from the Bank of Spain or Moody’s, the total is rather worrying: and we are not talking about small change but about the fact that our lenders still have an amount of property on their balance sheets equivalent to 20% of GDP.  And the worst thing is that, according to the Bank of Spain’s “Financial Stability Report,” this property is “unproductive.” Not only does it not generate any revenues, but it needs to be financed.

So that idea, doing the rounds a lot these days, that the banks have disposed of a substantial part of the “bricks and mortar” weighing on their balance sheets is optimistic. It’s true that in 2007, the total amount of real estate loans which the banks had on their balance sheets was 457 billion euros. But if they did manage to reduce a good part of this it was because they made provisions of no less than 282 billion euros for mortgage loans or impaired loans linked to the construction business. An impressive amount which has kept the lenders’ profit and loss acounts in a state of crisis. And then there are the savings banks, in an even worse situation, which transferred assets worth 51 billion euros to Sareb.

This amount of 231 billion euros includes gross loans in the hands of the banks, as well as the property assets which were assigned to them and they are constantly trying to sell. The volume of assets in the hands of the banks would be around 84 billion euros. And loans around 150 billion. Only five big banks still have doubtful property risk worth 100 billion euros. The one with the most is Popular, which has doubtful property loans worth 9.3 billion euros, after provisioning 40% of that amount. Then there is Caixabank with 7.2 billion euros, after provisioning 58%.

BBVA and Santander also have high risk ratios, but they are less noticeable because of their international business.  Bankia is one of the big banks which is in a better situation, having handed over most of its doubtful assets or unpaid loans to Sareb. It just has 3.786 billion euros of property assets left.

The total amount of the banks’ property risks is falling, but slowly. For example, the 12 lenders with the most risk only reduced this figure by 7%, which means that to eliminate it completely would take another 13 years. And this is because eight or nine years after the start of this crisis, the banks still include property assets related to operations which have definitely failed. For example, the volume of new property assets ajudicated to the banks grew by 4.562 billion euros.

But these increases, apparently, are not being offset by the ever increasing number of property asset sales carried out by the banks. Despite the fact that transactions of this kind have been announced over the last few years, it’s only lately with the rise in property prices that they have become interesting for the banks and are happening more frequently. And now it is expected that the banks will try to sell significant portfolios of assets in the market in the coming months.

Even if the banks are slowly managing to dispose of assets like offices, commercial centres, logistics parks…houses are quite another thing. They take a lot longer to sell. And the fact that unemployment and job precariousness is still high, the population is falling and stock of empty houses is even bigger, complicates the matter.

In any event, all the banks are trying to sell off real estate. Popular is in talks with various property funds to set up a vehicle where it can transfer a further 4 billion euros in property-linked assets. Another cause for concern for the Bank of Spain and the ratings agencies is the fact that 37% of the real estate assets in the hands of the banking sector consists of land. Most of that can’t be sold as there are no housing projects in sight for the time being.

About the Author

Fernando Barciela
Fernando Barciela has been a regular collaborator for Spain's leading daily El Pais' business section since 1994. He is also a regular collaborator on foreign policy. For Grupo Consejeros he interviews the top executives of Spain's listed companies. He was a correspondent with Diario de Noticias, Portugal's leading daily newspaper, in 1987-2004. He has a degree in Business Science and Journalism from the Complutense University.