ANDREA COMAS
From the FT's Lex blog
Spain's banks may as well say adiós to 2012. Thursday's first-quarter results from Banesto, the listed domestic banking arm of Santander, illustrate the harsh effect of the government's banking reforms. Net profit fell almost 90 per cent from a year ago to just €20-million after the bank set aside €475-million in provisions against dud property loans to comply with the new rules, and will provision as much again before the year is out. Coverage of bad loans rose 10 per cent to about 50 per cent. But the reforms, though pro-cyclical, are needed to rebuild the investment case for Spanish banks.
The pain is not limited to Banesto: others are belatedly facing up to their fantasy property valuations. And things will worsen as Spain's economy slows and austerity measures bite, driving up bad loans. Banesto's non-performing loans climbed 80 basis points from a year ago to almost 5 per cent of risk-weighted assets. Nor will the reforms dispel the sense that Spanish banks are undercapitalized, especially as their sovereign bond holdings wilt.
Banesto typifies the banks' creativity in mustering capital. To avoid a loss for the quarter it conjured up €365-million of extraordinary gains from selling industrial stakes and loans. It is also deleveraging fast - loans contracted 8 per cent. Deposits are falling faster: those from non-residents are down more than a fifth. No wonder it is proving hard to wean Spanish banks off central bank funding.
The Bank of Spain's total asset base as lender of last resort is now almost 40 per cent of gross domestic product. It has doubled in a year, Berenberg Bank notes, and is two-three times the ratio of central bank assets to GDP that triggered the Argentine, Russian, Mexican and Malaysian financial crises and devaluations.
Spain's banks, trading at an average 0.6 times book value, 40 per cent above the euro zone average, could easily fall further.