Tough rules to hit Spain banks hard

7/28/2019 Tough rules to hit Spain banks hard

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Tough rules to hit Spain banks hard
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Madrid: Spanish lenders are bracing for lower profits and dividends and a tougher funding

environment under new rules meant to prepare them for pan-European supervision next

year and avoid a repeat of last years multi-billion-euro bailout.

On Thursday, the Bank of Spain urged lenders to cap cash payouts to shareholders to the

equivalent of 25 per cent of profit and to be cautious on dividends paid in shares.

That came hard on the heels of another recommendation from the central bank to calculate

the impact of removing minimum interest rate clauses on residential mortgages, a move

that would lower payments for homemakers but hit bank profit.

Also a long-awaited European deal on how to distribute the cost of bank rescues hit share

prices last week of some banks in the regions weaker countries, including Spain, on fears

they could find it harder to attract funding.

Three banking sources said the new rules did not bode well for the second half of the year

because they left investors with the impression that banks had not been fully cleaned up

and that more measures were still to come.
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More uncertainty

The new guidelines on dividends introduce more uncertainty in a sector which already

registers high levels of insecurity at a time when the volume of additional provisions that

banks will need to book is still unknown, said one of the banking sources, who declined tobe named.

Lenders had already been asked by the Bank of Spain to review by September their 208

billion (Dh993.9 billion) in portfolios of refinanced loans.

Economy Minister Luis de Guindos said lenders would probably have to book another 10

billion in provisions to cover potential losses on those loans and seek 2 billion in fresh

capital once the review is complete.

This would add to the more than 80 billion booked last year, which hit profit across the

board, forced some lenders to scrap dividend payments or raise new funds on the stock and

bond markets and prompted the government to seek 42 billion from the European Union to

recapitalise the weakest ones.

The massive writedowns and the European-financed bailout have partly restored confidence

in the Spanish financial system after it was devastated five years ago when a decade-long

property bubble burst.

Passive lending

The rescue has so far failed to reactivate bank lending to Spanish companies and households,

while the rate of non-performing loans continues to rise.


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The banking source said the latest guidelines on dividends were

dictated by the International Monetary Fund (IMF), which earlier in

June called on Spanish lenders to reinforce the quantity and quality of

their capital by being prudent on cash dividends.

The source also said the Bank of Spain wanted all Spanish lenders to be

fully cleaned up and well capitalised before pan-European stress tests

next year.

In the short term, however, banks such as Popular and Sabadell, which

did not need public aid last year, may face headwinds.

Both have high levels of refinanced loans, have heavily used clauses in

mortgage contracts that set floors on interest rates and may find itmore difficult to fund themselves under the new EU regime, which

mean that second-tier banks in the periphery of the Eurozone are

likely to have to pay a premium to attract equity and debt investors.

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Tough rules to hit Spain banks hard