International Credit

Latest Credit Ratings for Spain's 10 Largest Banks

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Three of Spain's five largest banks are in trouble. Bankia, the fourth largest, holds about 10% of the country's loans and deposits.

Many of Spain's banks are in real trouble although the country's two largest -- Banco Santander and BBVA -- appear to be holding steady.  "Bad debts held by Spanish banks are at a 17-year high."

The Spanish government's decision to nationalize Bankia SA, the country's fourth largest bank, last week with a $24 billion bailout, the largest in Spain's history, effectively served notice that Spain's banking problems are worse than previously thought.  What's more, Bankia's crisis underscores the fragility of the Spanish banking system in a country with three consecutive quarters of receeding GDP, 24 percent unemployment and a debt-to-GDP ratio of 79 percent.

On May 17th, Moody's Investors Service downgraded the ratings of 16 Spanish banks and issued an outlook of negative or worse on every one of Spain's banks.  Moody's May downgrades followed on the heals of similar downgrades to Spanish and other European banks in February.  Moody's issued credit ratings for a total of 33 Spanish banks.

Moody's decision to downgrade seemed to center as much around Spain's problems as with those at the banks.  "Reduced creditworthiness of the Spanish sovereign, which affects the standalone credit strength of banks in multiple ways and limits the extent of government (or systemic) support that we expect to be available to banks," Moody's wrote in its 21-page report.

Moody's also pointed to Spain's adverse economic conditions, rapid asset-quality deterioration and restricted market funding access "with the ongoing euro area debt crisis and stress in the Spanish banking system driving investor concerns that make market funding more expensive, volatile and at times restricted for Spanish banks."

Bankia SA and La Caixa are the two largest Spanish banks in the most trouble as of the date of this article with Moody's credit ratings of Baa3 and Baa2 respectively (see chart).  Obligations rated Baa are considered medium risk in Moody's rating system but Baa3 is the last notch before Ba, which are obligations "judged to have speculative elements and are subject to subject to substantial credit risk."

Bankia previously received $5.85 billion in loan guarantees from the Spanish government as part of a larger $19.6 billion spent in order to shore up the country's banking system.  The Madrid-based lender has one of the industry's largest exposures to Spanish real-estate developers, with $48.77 billion in loans to the sector; $23.2 billion of which are considered problematic, according to a May 8th article in the Wall Street Journal.

Bad debts held by Spanish banks rose to a 17-year high in March, the Bank of Spain said in May, with 8.37% of loans held by banks, or $192 billion, more than three months overdue for payment, according to an article in the May 22th edition of the WSJ.  Bad loans skyrocketed in Spain after the country's housing bubble burst in 2008.

Bank executives say they expect the pool of debt in arrears to continue increasing as long as the country's economy is contracting and most economists don't see a turnaround for at least another year.  Spain's GDP contracted 0.3% in the first quarter of 2012 and is expected to fall the same amount in the second quarter.

"Clearly doubtful loans could climb appreciably in 2012-2013 with construction companies and property developers facing accelerating house-price falls alongside a stock of around one million unsold new properties," said Raj Badiani, an economist with IHS Global Insight, as reported in an April 19th article in the WSJ.

Earlier in the month, some government and central bank officials were studying whether to allow banks to transfer its toxic assets to a state asset management company or so called "bad bank."  But Emilio Botin, the chairman of Bank Santander, Spain's largest, was opposed saying it "would be something that would cost the taxpayer money and will not lead to providing more loans."  Instead, Botin called for "completing the restructuring" of the sector, which involves bank mergers and cost cutting.

Such mergers, however, "don't remove the holes but simply pass them on from one institution to another," wrote Xavier Sala-i-Martin, an economics professor at Columbia University in New York, on his blog as reported in a May 6th online edition of the New York Times.  "The only thing that will work is fresh money, to recapitalize some banks that have no capital left, and since it's clear that banks cannot raise sufficient private capital, that means there are only two solutions: bankruptcy or public money," wrote Sala-i-Martin.

The WSJ reported in its May 22nd edition that international investors were unsettled by the nationalization of Bankia earlier in the month.