Toxic loan bank will not solve Spain’s problems, says AllianceBernstein

The creation of a ‘bad bank’ ringfencing the banking sector’s €175bn of dodgy property loans is unlikely to solve Spain’s banking problems, according to Alliance Bernstein.

The proportion of non-performing domestic loans as a proportion of total domestic lending edged above 8% in the first quarter, nearing the highest point since 1990, of 9%.

In further bad news for the country and its banks, this week Standard & Poor’s downgraded Spain’s credit rating and that of 11 of the country’s largest banks. Moody’s is widely expected to follow suit.

AllianceBernstein’s European banking analyst, Victoria Norman, says any move to ring-fence bad loans could help Spain’s smaller banks, but she adds questions remain about how the entity would be funded, and who would be responsible for any residual losses, should the assets be run off at a loss.

Spain passed a law in February requiring its banks to set aside an additional €54bn of provisions and ‘capital buffers’.

Norman said, however, these “fail to address potential losses outside the banks’ real estate books. The jury is still out on the success of the February reform. We hope that increasing the provision coverage of nonperforming loans might ease the sale of assets.

“The large banks are indeed now starting to address their problems by selling property assets privately. As for the rest of the industry, it’s a little early to say, as they don’t have to set up their provisions until the end of the year.”

Norman said Spain’s banks will continue to face deteriorating asset quality and higher-than-normal funding costs this year, and into 2013.

Some analysts have said the remaining total bank funding requirement in Spain for this year will hit €100bn.

The ECB’s recent cheap loan program should help them meet that, Norman said, “but we also think [Spanish banks] will have difficulty funding themselves in the wholesale markets as long as confidence in the Spanish government and economy remains shaky”.

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