Restructuring of Spanish banks nears completion

The restructuring of Spain’s financial system is ‘very advanced’ and is likely to be completed over the next 12 months, according to Manuel Lagares, managing director of Banco Financiero y de Ahorros (BFA).

‘We have made major progress,’ Lagares said, noting that the provisioning effort made by the country’s financial system is the biggest by volume of any other banking sector in the world.

Lagares made the comments during INREV’s annual conference in Barcelona in April.

Back in 2008, Spain was the country with the largest number of bank branches per capita in the world and housed as many as 335 financial institutions, versus 18 at present. Local lenders had a big exposure to the real estate sector, particularly residential, which meant they suffered a terrible capital shortfall when the country's property boom came to a halt.

A first attempt in 2010 to put the banking system back on track with the merger of 40 troubled entities into a state-controlled giant, Bankia fell short of its target and a major overhaul of the sector was again necessary in 2011.

'Spanish banks have been forced to increase provisioning on real estate from 33% to up to 80% for land or 65% for unfinished developments,’ said Lagares, who has several years of experience in the real estate sector. From 2004 to 2011, Lagares was the managing director of Spain’s privately-held retail outlet specialist Neinver.

Lenders were also required to transfer their real estate holdings to Spain’s new bad bank Sareb, as a condition imposed by Spain's eurozone partners to provide a lifeline of up to €100 bn.

Sociedad de Gestión de Activos Procedentes de la Reestructuración Bancaria (Sareb) has taken over tens of billions of toxic loans and foreclosed property assets with discounts of between 46% and 63% to the assets’ independent appraisal value.

'The creation of Sareb has substantially reduced the uncertainty over the viability of the main local banks,' added Lagares of BFA, a state-owned banking group resulting from the merger in 2010 of seven savings banks. The lender is also the parent company of Bankia.

In terms of asset classes, 78% of the transferred portfolio consisted of loans and 22% of repossessed properties. Residential made up for roughly 80% of the assets, while commercial real estate represented as little as 6%.

According to Lagares, Sareb's aim is to divest the portfolio over the coming 15 years, with a target of achieving an Internal Rate of Return of 13 to 14%. Asked whether that is a feasible target, he said Sareb hopes to be able to take advantage of a new positive market cycle. 'This should be possible given the long- term investment view of the bank,’ he noted.