S&P: Spanish Banks has “lots left to do” to reduce toxic assets

S&P considers the clean-up has decelerated year after year. Regulators and investors will “pressure” to increase sales.

The Spanish banking sector has reduced during these few years its exposition to Non-performing Assets (NPAs), from over 282 billion in 2013 to slightly more than a 100 billion currently. Fact. Nevertheless, that amount is not impressing the rating agency Standard & Poor’s, that consider there’s still a long way ahead”. Quite the opposite, actually, they consider most of the entities have been postponing strategical decisions in this regard.

The path of organic reduction [of NPAs] has decelerated year by year, that suggests the need to take more ambitious needs to leave behind for good the problems issued from the crisis. Until not long ago, the bank managers have been opposed to accelerated sales of NPAs as they felt the associated costs were already discounted”, the S&P analysts say in a report on perspectives for Spanish banks for 2018.

Although these analysts see a positive horizon for the Spanish banks, thanks to the impulse of the economy and the revitalization of the Real Estate market, from the rating agency they consider that the sector has to step up on the deinvestment of their toxic legacy, inherited from Real Estate.

Trend change

It won’t be a fully voluntary decision, the agency points out, as there will be larger “pressure” from the regulators and the markets so that entities accelerate on sales, as they already did on the second half of 2017, Santander (transferring half of its portfolio to Blackstone), BBVA (doing as much with Cerberus) and Liberbank (with Bain Capital). From the agency, they expect these operations may have set a certain change of trend in the sector, that translates as well into more clean-up operations and larger.

Some Spanish entities have defended their strategic right not to pick accelerated sales (and so, heavily discounted) from its non-performing expositions. Caixabank has been placing its properties via its retail commercial network, for instance.  Also, from countries like Italy, the chance of internally managing an allegedly non-performing legacy, that is being placed in the market with two-digit yields promises or more (that is how opportunistic funds are buying).

Nevertheless, S&P considers the strategy to be wrong, even if it may have some economic sense. “Banks have probably not fully considered the cost of maintaining large teams to handle these portfolios, as well as the opportunity costs of not focusing on new potential deals”, the report cautions.

The problem is not just, as the authors of the report state, that NPAs has a cost on their own. They also suck in resources (economic, human, time…) to dedicate to other activities or business ways that may be more profitable or have a larger impact on the long term.

The NPAs sale will be one of the keys to board this disconnection with the past. The forecasts from S&P foresee that the sector will be capable to reduce its toxic exposition for around 20 billion in 2018. That’s without taking into account macro-portfolio sales. If their forecasts are met, the Spanish banks will end 2018 with an aggregated balance in which NPAs are still 11.5% of their assets.

Source Expansión. Translation by Miguel Vinuesa Magnet.

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