By Tania Suárez, in Madrid | Most Spanish financial analysts agree in their perception of Santander and BBVA as being favoured by the financial reform presented on Thursday by the minister of Economy Luis De Guindos. As a matter of fact, their quotes are gaining value.
The reform has been received favourably, although some analysts are still cautious. On the one hand, Sabadell’s point out that
“demand has increased, but the sector can gain attractiveness with cleaner balance sheets.”
Along the same lines, Renta4 analysts maintain that
“the reform is going in the right direction and the market should reflect this positively to the extent that, in the medium term, it should allow for better opportunities for bank balance sheet assets and relieve the pressure of the increased defaults/provisions”; although they further explain that “it will be crucial to see how the rest of the balance of assets associated to the promotion sector evolve,” so one cannot discard “a new round of provisions once this one is finalised”.
Bankia analysts are even more cautious and say that
“until more details are revealed, we must expect a certain degree of volatility in the sector.”
Meanwhile in Banesto, the reform is considered to be
“not very aggressive, since if we assume that most of the major entities of the sector could be (or already are) undergoing an integration process, this means that in fact one can generalise on the lengthening of the deadline for the ‘clean up’ to two years instead of one.”
From Bankinter’s point of view, in reality
“the desired outcome is that the healthy major entities be forced to ‘digest’ and make the ‘sick ones’ disappear, regardless of their size.”
This idea is also defended by ACF analysts:
“more efficient entities will emerge from the derived synergies that the merger processes will produce.”
THE REFORM IN BRIEF
The new provisions add up to the well known €50 billion. These are divided into three types of problematic assets:
1. Aspecific provision in the amount of €25 billion will be required against income and a cushion capital of an estimated €15 billion so that the provisions on land coverage will be 80% (up from 31%), the one for current promotion will be of 65% (up from 27%), and the one for completed promotion and housing will be 35% (up from 25%).
2. A ‘cushion capital’ of €15 billion, which consists of a provision of 20% over the land and a 15% on the ongoing developments. This cushion, along with the specific provision, will increase the provisions for completed constructions to 35%, to 65% that for ongoing construction and to 80% that for land.
3. Ageneric provision of 7% over the non-problematic assets associated to the real estate sector that will imply an amount of about €10 billion. A deadline has been set to establish these provisions: December 31, 2012.
A deadline extension from one year to two years will be granted to those participating so that they may cover the provisions; part of the provision could come directly from equity; the FROB will be able to buy contingent convertible bonds issued by banks.
There are four months to undertake mergers and ten to implement them, and there will be a year to make provisions, except for the merged entities which will have two (Banco Popular and Banco Sabadell will have this advantage). Based on this regulation a general norm (to be imposed by Royal Decree) of provisions for assets that continue to enter the balances will be applied.
Sabadell explained that
“in addition to this measure, an increase in funding (charged to the Treasury) of 6,000M Euros in the FROB will be approved; this will generate an endowment of 15,000M Euros. The aim is to improve the debt/FFPP ratio.” The one most adversely affected, says Citi analyst José Luis Martínez Campuzano, would be Banco Popular with 3.6Bn Euros in additional provisions.
For those entities that cannot meet the requirements on their own, the FROB will underwrite CoCos (contingent convertibles). CoCos are convertibles that automatically turn into capital if the base capital falls below a certain level: at an 8% cost, according to Bankinter.