Madrid, December 13, 2010 -- The outlook for the Spanish banking system remains negative because banks' capitalisation, profitability and access to market funding are expected to remain weak, says Moody's Investors Service in its Banking System Outlook for Spain. The driving factors for this continued negative trend are the country's difficult economic conditions, continued asset quality deterioration and the Spanish government's fiscal austerity plans. This outlook expresses the rating agency's expectation for fundamental credit conditions among Spanish banks over the next 12 to 18 months.
The economic downturn of the past three years has led to a 4.9% decline in Spain's gross domestic product (GDP) and a sharp rise in unemployment (19.8% in September 2010 from 8% YE 2007). "Moody's expects corporate profits to remain depressed for some time, especially in view of the limited likelihood of an additional economic stimulus, adding strain on unemployment and contributing to further deterioration in loan quality," says Alberto Postigo, VP-Senior Analyst and author of the new report.
Moody's current base-case scenario anticipates economic lifetime losses for Spanish banks of up to EUR176 billion, of which the banks have so far only recognised half (EUR88 billion) through reported write-downs and reserves. "Moody's estimates the net capital shortfall to be in the range of EUR17 billion for the Spanish banking system as a whole after taking into account already committed funds from the government and other offsetting factors such as tax-effected provisioning," says Mr. Postigo. "The earning generation capacity of banks is unlikely to fully compensate for the need of capital, which will force some banks to raise additional capital externally, possibly via additional capital injections from the government-sponsored FROB program," he continues.
"Moody's views positively the well established retail franchises of most Spanish banks, which will help them rebuild their credit profiles over the longer term. However, a necessary prerequisite for achieving stability in Spain's banking system is an acceleration in the pace of consolidation within the system, which entails a realization of losses and recapitalizations," opines Alberto Postigo. Additionally, balance sheets need to be cleansed of troubled assets, thus preventing a prolonged drag on the banks' performance. Banks also have to focus on their key strengths, namely retail banking and lending to small and medium-sized enterprises (SMEs) in their core markets. Finally, banks need higher capital ratios to fully restore market confidence. In this context, Moody's recognises that the total EUR99 billion earmarked by the Spanish government under the FROB for banks' recapitalisation still provides room for Spanish banks to strengthen their capital ratios beyond the levels used in the rating agency's stress test exercise.
Moody's long-term senior debt ratings for Spanish banks benefit from substantial ratings uplift (average uplift of over three notches) due to implied systemic support. This means that debt ratings could potentially be negatively affected either by a weakening in the creditworthiness of the sovereign or a reduction in the expectation that the Spanish government will support Spanish banks in case of need. However, the incentive of the government to continue to provide support remains strong, which is in line with Moody's current assumptions of support, including that for subordinated as well as senior creditors. Given the current dynamic environment, the rating agency will continue to monitor this assumption of support and its comprehensiveness over time.
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