Spain Orders Banks to Set Aside More Money for Problem Property Assets - NYTimes.com

Spain Orders Banks to Set Aside More Money for Problem Property Assets

NY Times

MADRID — Spanish banks will need to set aside funds to cover billions of euros more in bad property assets under new rules announced Thursday by the country’s economics minister, Luis de Guindos.

The rules, to be adopted by government decree Friday, are the latest effort by the government to require banks to recognize the cost of years of reckless lending during a construction boom that came to an abrupt halt four years ago, with the onset of the financial crisis.

Mr. de Guindos called the additional provisioning of €50 billion, or $65.7 billion, “substantial,” especially given what had been achieved to date. From 2008 to mid-2011, Spanish banks set aside €66 billion for doubtful property assets, he said, even as Spain’s construction sector collapsed.

Over all, Spanish banks have accumulated €323 billion of property assets, of which €175 billion have been labeled “problematic” by the Bank of Spain.

“We are taking an important step toward transparency and toward the health and reinforcement of the banking sector,” Mr. de Guindos said at a news conference.

The new rules are also designed to pave the way for a fresh round of banking mergers, particularly aimed at ailing cajas, or savings banks.

Since the start of the crisis, the number of savings banks has already been cut to 17 from 45. But several of the remaining or merged entities remain troubled, in particular Bankia, which was the result of a seven-way merger led by Caja Madrid and which went public last year in a share offering that raised €3.3 billion.

In recent weeks, speculation has focused on whether CaixaBank could absorb Bankia.

Such a combination would create the largest lender in Spain. But CaixaBank, based in Barcelona, is likely to demand not only control of the combined entity but also significant state guarantees to help it mop up Bankia’s distressed property portfolio.

Until the crisis hit and required the central bank to rescue a handful of cajas, the savings banks had accounted for about half of the Spanish banking sector and had spearheaded the financing for the construction boom, often under the control and guidance of local politicians.

Under the rules presented Thursday, banks will need to set aside funds equivalent to 80 percent of their property assets, compared with 31 percent now.

For housing that is already built, the provisioning requirement climbs to 35 percent from 25 percent.

The new thresholds must be reached at the end of this year for most banks, with an additional year granted for newly merged entities.

The measures come as Spain is bracing for a recession, with the economy expected to contract 1.5 percent and unemployment — already more than double the European average — seen rising further.

Spain’s construction collapse has also been costly for commercial banks, as underlined Thursday by Banco Bilbao Vizcaya Argentaria, which reported a decline of 39.5 percent in net profit from domestic operations last year, to €1.36 billion.

BBVA, the second-largest bank in Spain by assets, after Banco Santander, said its 2011 net profit fell 34.8 percent, to €3 billion, with Mexico overtaking Spain as the market contributing most to earnings.

BBVA also reported its first-ever quarterly loss, of €139 million for the fourth quarter, after a write-down of €1.01 billion relating to its activities in the United States.

Santander this week reported a 35 percent decline in net profit for 2011, to €5.35 billion.

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