Spanish Banks Begin Search for Investors to Plug 21 Billion Capital hole

Spanish banks that together need as much as 15.2 billion euros ($21 billion) to meet minimum capital levels now must persuade investors that their battered balance sheets offer the potential return to match the risk.
Twelve lenders, including eight savings banks and the Spanish units of Deutsche Bank AG (DBK) and Barclays Plc (BARC), are among the lenders that fell short of government-set capital requirements, the Bank of Spain said yesterday. The institutions whose levels are furthest from the required minimums include Bankia, which needs 5.8 billion euros, Novacaixagalicia, which requires 2.6 billion euros, CatalunyaCaixa and Unnim.
Yesterday’s announcement sets in motion a timetable that gives lenders as long as a year to raise funds or risk being taken over by a government bailout fund. Investors may be skeptical that the Bank of Spain’s estimates of how much capital the banks need fully reflect losses hidden on balance sheets, putting the onus on them find investors quickly, said Inigo Lecubarri, a fund manager at Abaco Financials Fund in London.
“At this stage, I don’t think anyone will be really convinced by anything,” said Lecubarri, who helps manage about $200 million at Abaco. “People will only be convinced when someone credible comes and puts some money on the table to invest.”
Rating Cut
Spain’s credit rating was cut yesterday to Aa2 by Moody’s Investors Service, which said lenders may need as much as 50 billion euros to meet the new rules. The Bank of Spain said its estimate of 15.2 billion euros may end up lower as some savings banks opt for stock listings that will reduce the amount of capital they need under Spain’s new rules imposed last month.
“In our baseline we see potential losses of 80 billion euros-plus, in an extreme scenario it could be twice as much,” Nouriel Roubini, founder of Roubini Global Economics, told Maryam Nemazee on Bloomberg Television’s “Countdown” in London today. “The fiscal costs of backstopping the financial system are going to be larger than the government is suggesting.”
The Bank of Spain previously estimated the overall capital shortfall wouldn’t exceed 20 billion euros, or 2 percent of gross domestic product. The government, fighting to rein in the euro region’s third-largest budget deficit, wants most of that to be raised privately even as central bank Governor Miguel Angel Fernandez Ordonez said Feb. 21 that some lenders will ask the state-rescue fund FROB for help.
‘Underwhelming’
“This is underwhelming and certainly will be criticized: we calculate 40 billion to 50 billion euros,” said Arturo de Frias, head of banks research at Evolution Securities. “The difference is that the Bank of Spain calculates the deficit as of today whilst we add future impairment losses.”
The lenders have until September to meet new core capital requirements of 8 percent for listed lenders or 10 percent for banks without shareholders that also depend on wholesale financing. They can seek an extension until 2012 if they commit to listing shares.
The capital analysis carried out by the Bank of Spain shows that the banking system as a whole is “solvent,” Francisco Gonzalez, chairman of Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s second-biggest bank, told shareholders in a speech today in Bilbao, Spain. “It’s vital to complete the process of restructuring the savings banks with rigor and speed,” he said.
Contagion Struggle
Spain is trying to stem contagion as investors raise bets that Portugal will need a bailout and Greece and Ireland lobby to renegotiate rescue deals. Prime Minister Jose Luis Rodriguez Zapatero’s government is seeking to show that lenders can weather a fourth year of economic slump and a jobless rate of 20 percent, as bond yields on peripheral euro-area nations surge.
While Spain’s public-debt burden is lower than that of France or Germany, the gap between Spanish and German borrowing costs is 15 times as wide as it was in the first decade of monetary union. The government needs to rein in the budget deficit and restore the economy to growth as private debt built up during a decade-long housing boom slows the recovery.
The government approved the new capital requirements on Feb. 18 and said lenders that fail to meet them risk partial nationalization via the purchase of ordinary shares by the FROB. That facility, which can take on as much as 90 billion euros of debt, has already committed about 11 billion euros through the purchase of preferred shares.
Clarity Call
“My opinion is that capital needs are not the main issue,” said Luis de Guindos, a former deputy finance minister in the government of Jose Maria Aznar and a professor at IE business school in Madrid. “I think the best way to convince investors is to have full clarity and transparency on real- estate exposure of the savings banks.”
Spain’s two biggest savings banks, La Caixa and Bankia have already announced plans to become listed lenders. Bankia’s capital shortfall of 5.8 billion euros will fall to 1.8 billion euros as it lists shares and qualifies for the lower capital threshold. Mare Nostrum, which needs 637 million euros in capital, and Banca Civica, which needs 847 million euros, have also said they will sell shares.
Banks’ Reactions
Some lenders published statements in response to the Bank of Spain’s announcement. Unnim, a grouping of savings banks that needs 568 million euros to bridge its 3.3 percentage-point capital gap, said in a statement it would consider “different alternatives,” including taking money from the FROB.
Novacaixagalicia, whose core capital ratio is 5.2 percent compared with the 10 percent it needs, didn’t have any immediate comment, a spokesman said in a phone interview. Banca Civica said in a statement senior executives had met with 32 potential investors in meetings in New York and London in recent weeks.
Core capital as defined under Spain’s new banking law includes reserves, preference shares owned by the FROB rescue fund, and bonds that are mandatorily convertible into shares by 2014.
To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net

Article from Bloomberg 11th March 2011