Spanish bank take-under reveals real estate mess

Spanish bank investors have just had a painful reminder of the real estate mess that burdens the country’s banking system. Just a few months after Banca Civica listed on the stock market, Caixabank is buying the smaller lender – and its dud property loans – in an all-share deal priced at an 11 percent discount to market value. Caixabank will reap savings from cutting costs, including its own network. Without state support, though, the deal is still a risk.

Banca Civica was in a bind after the government recently tightened requirements for impaired property loans. It needed to do a deal. For Caixabank, already one of Spain’s biggest banks, the rationale is less straightforward. The combined entity will become Spain’s largest lender by assets, with leading positions in the wealthy regions of Catalonia and Navarra, and populous Andalusia.

On paper, the deal makes financial sense, giving Caixabank a good excuse to restructure its own bloated branch network. It says the combination will generate 540 million euros in annual synergies, mostly from cost savings, which have a net present value of 1.8 billion euros – nearly twice the 977 million euro price the deal puts on Banca Civica’s equity. Caixabank reckons its earnings per share will increase by more than 20 percent in 2014, excluding restructuring costs.

The deal won’t stretch Caixabank’s balance sheet too far, either. It is buying Banca Civica for a third of its 2.9 billion euro book value, and will write down the lender’s real estate assets by 3.4 billion euros. After taking into account various adjustments, including the conversion of preference shares, the hit to Caixabank’s capital will be 167 basis points. That shouldn’t impede it from reaching the 9 percent core capital ratio that European regulators require it to hit by the summer.

UPDATE: Fitch: Spanish Real-Estate Exposure Rules Stiff But Necessary

Fitch Ratings on Wednesday called Spain's new real-estate asset rules a big but necessary step toward extracting the country from a banking crisis that has continued to weigh down the broader economy.

Under Spain's stiffer rules on real estate, banks will need to comply with harsher regulatory capital requirements and meet the European Banking Authority's 9% core capital requirement.

The entire banking sector's total exposure to the real-estate sector at the end of June reached EUR323 million, of which EUR175 million was potentially problematic, according to Bank of Spain data. Soured real estate assets have plagued Spanish banks and held back the nation's economic recovery.

The country's latest move will force banks to build up coverage levels relatively quickly amid an economic slump that has hurt their overall operating performance.

Such rules are aimed at reducing risk from the banks' real-estate exposures through income statement provisions and capital buffers. The move is still needed to stimulate credit and promote economic growth, the ratings service said.

Fitch said Spain's larger financial institutions should be able to meet the new requirements without any adverse impact on their ratings, given the one-off nature of the change this year.

Smaller banks, particularly those relying on capital injections from the state, will find it harder to comply with the rules in just one year, given their low revenue generation and tighter capital.

Stronger institutions that merge with weaker institutions will also face downward rating pressure due to the potential weakening of their risk profile, additional provisioning and capital needs and execution risks, Fitch added.

Fitch said it expects larger players to report lower earnings due to the change, while some smaller domestic banks could report losses in 2012 unless they register capital gains.

Spanish banks offer 100% loans to clear distressed

Whilst over in the UK the tightening of lending conditions has made securing a home with less than 25% deposit an impossiblity for most would-be buyers, over in Spain banks are making it easier than ever for investors to get in on the market without the difficult commitment of an initial lump sum - as long as you're willing to buy distressed.

Signs Suggest Spain's Real Estate Market Near Stabilization

he latest real estate figures on prices and transactions are giving some hope that the Spanish property market is improving but foreign buyers are still not returning to the country in any great numbers. Prices are still falling, but less with every passing month, according to the monthly house price index published by Tinsa, one of Spain’s leading appraisal companies.

Average Spanish property prices fell by 4.4% over the 12 months to the end of May. ‘If the Tinsa figures are to be believed, the rate of decline in Spanish property prices has been slowing since June 2009, when it peaked at -10.1%. If the trend towards smaller declines keeps up, average property prices will be stable, or even growing slightly before the end of the year,’ explained Marc Stucklin of Spanish Property Insight.