It is necessary to dispel the doubts that are being unfoundedly cast over the Spanish financial system as a whole by generalising the viability problems of a few specific institutions to the rest of the system’s sound banks.
Spanish banking remains profitable after five years of crisis, despite the complex economic and financial environment.
The extraordinary provisioning requirements established in Royal Decree-Laws 2 and 18 of 2012 affect all Spanish credit institutions in a generic and indiscriminate manner, regardless of their viability.
Spanish banks have reported that they will make every necessary effort to meet these requirements using their own resources.
To restore financial stability and economic growth in Spain, it is necessary to continue deepening the structural reforms needed to correct macroeconomic imbalances as soon as possible.
Eurozone authorities must remove, as soon as possible, the uncertainties surrounding the euro’s survival and reach agreements that restore confidence in the strength and irreversibility of the euro.
The AEB Secretary General, Mr Pedro Pablo Villasante, highlighted, during the presentation of Spanish banks’ results for the first quarter of 2012, that Spanish banking managed in this period to generate profits and maintain positive profitability despite the complex economic and financial environment in which they were produced.
“Since the crisis began five years ago, Spanish banking profits have declined year after year, but throughout this difficult period results have remained positive, and without the need to resort to injections of public capital,” he stated.
As he explained, in the first quarter of the year the widespread decline in credit demand and the deterioration in portfolio quality continued, which has translated into increases in non-performing loans and the need to continue making significant provisions.
From 2007 to March 2012, the provisions made by Spanish banks against their consolidated results amount to €110,283 million, €34,818 million more than the attributable profit for that period. On average total assets, the annual level of provisioning is twice that seen before the crisis and currently reduces the banking sector’s operating margin by 55%.
This year the effort will be even more intense, Villasante said, “due to the reducing effect on results of the high provisioning requirements established by the Spanish authorities through the Royal Decree-Laws of 2 February and 18 May.” In fact, the provisions made during the first quarter of 2012 already include the charges that some banks have recorded to cover part of the new provisions set out in RDL 2/2012 of 3 February.
In his view, the extraordinary provisioning requirements affect all Spanish credit institutions in a generic and indiscriminate manner, regardless of their viability. “Very high provisioning requirements have been established for credit institutions’ exposures to the real estate sector—including those classified as normal risk—and clearly higher than those required by international accounting standards, calling into question the adequacy of provisioning and accounting classification of the balance sheets of all Spanish credit institutions, regardless of their specific circumstances,” he stressed.
In any case, he recalled that Spanish banks have reported that they will make every necessary effort to meet these requirements using their own resources.
The AEB Secretary General referred to the economic difficulties and financial tension that Spain and the eurozone are experiencing at present. To restore financial stability and economic growth, in his view, it is necessary to continue deepening the structural reforms needed to correct macroeconomic imbalances as soon as possible. At the same time, he considered it essential that the eurozone and the European Union, to which Spain belongs, urgently move forward in their process of economic, fiscal and banking integration, without overlooking economic stimulus policies that can offset the contractionary effects of the austerity measures being implemented. “We are all aware that the solution to our current problems will come with more Europe,” said Pedro Pablo Villasante, who called on the authorities to remove as soon as possible the uncertainties surrounding the euro’s survival and to reach agreements that restore confidence in the strength and irreversibility of the single currency.
In his view, the euro crisis has highlighted the structural weakness of a monetary union that lacks a central bank to defend the debt of eurozone countries. The crisis has also revealed the interconnection between banking crises and countries’ fiscal capacity, creating a destructive downward spiral between sovereign solvency and that of the country’s banks. Finally, it has made clear the slowness with which eurozone governments make decisions in the face of existing difficulties—political timelines that are not accepted by the impatience and speed with which financial markets operate.
In this context, distrust of the Spanish economy has once again taken hold in the market, despite the significant structural reforms adopted by the Spanish authorities, among which Villasante highlighted the inclusion in our Constitution of the obligation to maintain budgetary fiscal surpluses; the labour, budgetary and financial reforms approved by the new Spanish government, which has a parliamentary majority, together with its firm commitment to reduce the large deficit reached at the end of 2011 and to meet the convergence target in 2014.
Likewise, the AEB Secretary General noted that distrust in the Spanish economy has spread to its financial system, and in particular there are doubts about the proper valuation of its assets, especially real estate assets, which is weighing on banks’ share prices and making it harder for them to obtain funding in wholesale markets.
“We are therefore at a delicate and pivotal moment in which it is necessary to dispel the doubts that are being unfoundedly cast over the Spanish financial system as a whole by generalising the viability problems of a few specific institutions to the rest of the system’s sound banks,” Villasante concluded.
He insisted, as the AEB has done since the beginning of the crisis, on the need to distinguish between viable and non-viable institutions, which must be resolved as soon as possible through their absorption by others that, with greater solvency and better management, can secure their future. If this is not done, he warned, the system as a whole will be called into question and solvent, viable banks will be harmed.
This view, he said, has been endorsed by the International Monetary Fund in its recent report on the Spanish financial system, in which it warns that unless institutions with viability problems are resolved, the regulatory and funding-cost penalty for sound banks will continue, with the risk of delaying credit growth and the economic recovery.
Nevertheless, the AEB Secretary General believes that the Spanish authorities have opted for a broad-based approach to undertake the restructuring of the financial system, first by increasing capital requirements, and later by requiring maximum provisioning of institutions’ real estate portfolios and subsequent recapitalisation as needed, either with institutions’ own resources or with public resources from the FROB.
In view of this set of circumstances, the AEB Secretary General insisted that Spanish banks have chosen to persevere with the strategy they began to deploy at the start of the crisis, centred on their intention to rely on their own resources and not request assistance. A strategy based on generating recurring and predictable results; a lower relative level of risk in their operations; and, above all, maintaining their competitive capacity by strengthening the balance sheet, preserving operational efficiency, and geographically diversifying activity and sources of income.
