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Spanish Banking Sector: Progress Report 22/02/2011
London, 22nd February 2011
Tokyo, xx February 2011
Hong Kong, xx February 2011
Singapore, xx February 2011
Jos Mara RoldnDirector General of Banking RegulationBanco de Espaa
Spanish Banking Sector: Progress Report 22/02/2011
London 22 nd February 2011
Tokyo 25 th February 2011
Hong Kong 28 th February 2011
Singapore 1 st March 2011
Jos Mara RoldnDirector General of Banking RegulationBanco de Espaa
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The Spanish economy in perspective
The Spanish economys sharp growth was accompanied by high levels ofinvestment, only partly residential investment
SOURCES: ECB, Eurostat and Citigroup
-1
0
1
2
3
4
5
6
00 01 02 03 04 05 06 07
Change in GDP, %
Germany
Spain
France
Italy
United Kingdom
0
5
10
15
20
25
30
35
00 01 02 03 04 05 06 07
Total investment/GDP, %
Germany
Spain
France
Italy
United Kingdom
0
5
10
15
20
25
30
00 01 02 03 04 05 06 07
Gross savings/GDP, %
Germany
Spain
France
Italy
United Kingdom
0
200
400
600
800
1000
1200
14001600
1800
Ireland
United Kingdom
Belgium
Portugal
France
Hungary
Greece
Spain
Germany
Italy
USA
Japan
External debt, 2009, %
Gross internationalliabilities/GDP
Gross externaldebt/GDP
0
5
10
15
20
25
30
Spain Germany France Italy U. Kingdom
Investment/GDP, average 2000-2007, %
Non-residentialinvestment/GDP
Residentialinvestment/GDP
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The Spanish economy in perspective
The growth process was accompanied by budgetary equilibrium and lower,
and declining, levels of public debt, unlike in other EU countries
SOURCE: Eurostat
deficit
surplus
-5
-4
-3
-2
-1
0
1
2
3
4
00 01 02 03 04 05 06 07
Budget deficit/GDP, %
Germany
Spain
France
Italy
United Kingdom
0
20
40
60
80
100
120
00 01 02 03 04 05 06 07
Public debt/GDP, %
Germany
Spain
France
Italy
United Kingdom
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The Spanish economy in perspective
But some imbalances were
also built up in the Spanisheconomy during itsexpansionary phase
Increasing indebtedness of
the private sector
Excessive increase of thehousing sector
Increasing current accountdeficit
SOURCE: ECB, Federal Reserve and Office of National Statistics
40
90
140
190
240
1997 1999 2001 2002 2004 2006 2007 2009
Debt of the non-financial private sector as a percentageof GDP
Spain
Euro area
United Kingdom
USA
0
1
2
3
4
56
7
8
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
Investment in housing as a percentage of real GDP
-12
-10
-8
-6
-4
-2
0
1995 1998 2001 2004 2007 2010
Current account deficit as a percentage of GDP
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The Spanish economy in perspective
Currently, the Spanish economy isposting still-weak but positive
quarter-on-quarter rates of change inGDP
while IMF and market consensusGDP growth projections are at similarlevels for the Spanish economy as for other euro area countries from 2012
SOURCES: INE, Eurostat, IMF and market data
-6
-4
-2
0
2
4
2008
2009
2010
2011
2012
2013
2014
2015
Year-on-year change in GDP. IMF forecasts, %
Germany
Spain
France
Italy
Euro Area
-6
-4
-2
0
24
2008
2009
2010
2011
2012
2013
2014
2015
Year-on-year change in GDP. Consensus forecasts, %
Germany
Spain
France
Italy
Euro Area
-3.0-2.5-2.0-1.5-1.0-0.5
0.00.51.01.5
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10
Quarter-on-quarter GDP rate, %
Euro area
Spain
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The Spanish economy in perspective
The current weakness of GDP is due to the ongoing adjustment of thepreviously mentioned imbalances
Much of the adjustment is being made via job destruction , which denotes aproblem of the Spanish labour market
SOURCES: INE and Eurostat
-6
-4
-20
2
46
8
1012
14
16
92 94 96 98 00 02 04 06 08 10
Year-on-year GDP change, %
Euro area
Spain
Interest rates inSpain
0
5
10
15
20
25
30
-10
0
10
20
30
40
50
60
92 94 96 98 00 02 04 06 08 10
Unemployment rate and year-on-year change inpopulation, %
Rate of change intotal population
Rate of change inforeign population
Unemployment rate(right-hand scale)
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The Spanish economy in perspective
The budget deficit has worsened
markedly
Nonetheless, and thanks to a goodstarting position, and to the fiscalconsolidation plan approved by thegovernment, IMF projections placeSpains debt/GDP ratio below thatof other developed countries
SOURCE: IMF(a) The Spanish Government has established an unconditional objective regarding the fiscaldeficit for years 2012 and 2013. In 2012 the objective of fiscal deficit over GDP is -4.4%, andin 2013, -3%.
2012 proyections, as a proportion of GDP
DeficitCyclically-adjusted
deficit Public debtUSA -7.2 -5.4 102Euro area -4.0 -3.1 88.7
France -4.9 -3.8 89.4Germany -2.3 -2.2 77.1Italy -3.5 -2.3 120.1Spain -6.0 -5 72.6
Japan -8.0 -7 232.8U. Kingdom -6.1 -4.5 84.5Canada -3.3 -2.5 84.8
-12
-10
-8
-6
-4
-2
0
2
4
00 01 02 03 04 05 06 07 08 09 10E
Spain's budget deficit as a proportion of GDP, %
(a)
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The Spanish economy in perspective
The markets have tended to correct, in part, the overreaction seen in the
public debt spread in the context of the sovereign debt crisis in the euroarea
SOURCE: Datastream
0
50
100
150
200
250
300
350
400
Sep-09 Jan-10 May-10 Sep-10 Jan-11
5-year senior debt CDS, bp. Data to 7 February 2011
Emerging Africa, country1
Emerging Africa, country2
Emerging America, country1
Emerging America, country2
Emerging Asia, country1
Emerging Asia, country2
Spain
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The Spanish economy in perspective
Some of the imbalances are also centred on the real estate sector
House prices rose more in other countries than in Spain (50pp more in Ireland and 20pp more inthe UK)
The falls from the peaks reached are also proving greater in these other countries (19pp more inIreland and 2pp more in the UK)
Thus, comparatively, the degree of the adjustment in Spain is being harder than in other countries
0
10
20
30
40
50
60
Ireland - Spain Ireland - Spain U. Kingdom - Spain U. Kingdom - Spain
Difference in housing prices growth from 1997 until the peak (pp)Difference in housing prices adjustment from the peak until last available data (pp)
Note: differences are calculated as the difference between the growth rate of the corresponding country vis--vis Spain in both the growth phase and the adjustment phase
GrowthAdjustment
Adjustment
Growth
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The Spanish economy in perspective
The growth of house prices in Spainevidenced a lower overvaluationcomponent than that in othercountries (IMF, April 2008)
It was, therefore, largely based onfundamentals, and this is reflected ina lesser need for downwardcorrections in the current phase
Demographic and socioeconomicfactors
Spanish euro area membership, witha permanent real interest ratereduction effect, implying a permanentincrease in asset valuations
-6.1
1.7
11.8
16.2
17.0
17.0
18.1
20.6
21.8
28.0
29.2
32.1
-10 0 10 20 30 40
Austria
Germany
Italy
Sweden
Spain
Belgium
Denmark
Norway
France
U. Kingdom
Netherlands
Ireland
Percentage increase in house prices notattributable to fundamentals, %
SOURCE: IMF, April 2008
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Provincial breakdown of the growth in house prices
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The Spanish economy in perspective
There has been an 18%adjustment in real terms (13% in nominal terms) inhouse prices in Spain fromtheir peak to 2010 Q4
This adjustment reflects theaverage figure, consistent with
sharper adjustments in differentregions and market segments
This adjustment in prices isconsistent with a volume ofnew house transactions
that has stabilised ataround 225,000 units
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The Spanish economy in perspective
The price adjustment isfollowing a similar pattern tothat observed in previouscycles
Affordability indicators for
households are once again athistorically low levels
60
70
80
90
100
110
120
0 1 2 3 4 5 6 7 8 9 10
Years following the peak in house prices
Housing prices in real terms. Comparison of current andprevious price cycles. 100=price observed in the peak of each cycle 1979
1991
2007.Actual
2007.Centralscenario
(July 2010)
20
25
30
35
40
45
50
55
60
1995 1997 1999 2001 2003 2005 2007 2009 2011
Affordability indicator, % gross disposable income
Worsening conditions
Improving conditions
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The Spanish banking sector in perspective
The weight of the banking sector is similar
to that of other EU countries In Spain, the sector basically comprises
commercial banks and savings banks
Spanish banks pursue a traditional retail banking model
There is no originate-to-distribute model
No investment in/generation of toxic assets (CDOs, CDOs^2, )
No conduits or SIVs were set up, since their consolidation would have been required
Prudent approach to wholesale funding; issuance towards the longest-dated termsavailable
Franchise value
SOURCE: ECB
0
100
200
300
400
500
600
700
800
900
I re land U. Kingdom France Spa in Germany I ta ly
Total banking sector assets/GDP, %, Dec.2009
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This is reflected in the sectors good starting position before theinternational financial crisis in the summer of 2007
SOURCE: IMF (October 2010)
15
The Spanish banking sector in perspective
0
0.2
0.4
0.6
0.8
1
1.2
ES IR IT FR UK DE
ROA, 2007 (%)
0
2
4
68
10
12
14
DE UK IR ES IT FR
Solvency ratio, 2007 (%)
0
2
4
6
8
10
IT ES UK IR DE FR
Capital/assets, 2007 (%)
0
50
100
150
200
250
ES FR UK DE IT IR
NPL coverage, 2007 (%)UK data referes to 2006
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The sectors good starting position was also evident regarding institutions
funding policiesSolid retail deposit base
Issuance in the wholesale markets towards the longest-dated term, making for a maturity structure where maturities are mostly concentrated after 2014
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The Spanish banking sector in perspective
SOURCES: BdE and ECB
0
1020
30
40
50
60
1H2011
2H2011
1H2012
2H2012
2013
2014
Maturity structure of debt issued on markets, including short-term paper. January 2011, %
0
10
20
30
40
50
ES DE IT IR FR
Customer deposits (except credit institutions) / T. assets, 2007,%
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The Spanish banking sector in perspective
The Spanish banking sector built up
weaknesses during the economys
upturn
Sharp growth in credit, chiefly
in the construction and real
estate developers sector
Excess capacity
These imbalances have been more acute for a number of savings banks
Expansion outside their traditional geographical area
Singular stakeholder model that complicated their capacity of issuing equity
SOURCES: Eurostat and National Central Banks
0
10
20
30
40
50
6070
Ireland France Spain Italy Germany U. Kingdom
Credit to construction and real estatedevelopers/GDP. Dec-09, %
f h d d d
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Impact of the crisis and measures adopted
The impact of the international financial crisis on the Spanish banking sector,and therefore the measures adopted, can be characterised in different periods
The first , characterised by the outbreak of the international financial crisis andresilience of Spanish banks in the face of this first wave. Afterwards, the persistenceof the crisis and the crisis in the real economy translates into the adoption ofpreventive measures regarding the Spanish the banking sector
The second , characterised by the sovereign debt crisis in the eurozone in the firsthalf of year 2010, which led to the publication of stress tests, the tightening ofprovisioning requirements and amendment of the savings banks law
And a third stage , since summer 2010, characterised by a fresh spike in the
sovereign debt crisis which in Spain leads to much higher transparency requirementsand finally to the measures adopted under the recently approved Royal Decree-Law
Over this period, Spanish banks have already recognised assetimpairments for an amount equivalent to a nearly 9% of GDP
I t f th i i d d t d
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Impact of the crisis and measures adoptedFirst period
Summer 2007 December 2009 December 2010
LehmanBrothers
Resilience
Start of economic crisis
Sovereign debtcrisis: Greece
Sovereign debtcrisis: Ireland
Economicdownturn
Granting of guarantees for banksissuances of new debt and the creation ofthe fund for the acquisition of high-quality assets
The Eurosystem approves to meet all thedemands for liquidity (full allotment)
Creation of Fund for the Orderly Restructuring of the Banking Sector(FROB), with capacity to obtain fundstotalling 99bn
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Impact of the crisis and measures adoptedSecond period
Sovereign debt crisis in the euroarea
Weakness of the economy
Doubts over the quality of realestate assets
Stress testing
Tightening of provisions
Reform of savings bankslegislation
Completion of savings banksmergers and concentrationprocess
Summer 2007 December 2009 December 2010
LehmanBrothers
Sovereign debtcrisis: Greece
Sovereign debtcrisis: Ireland
Economicdownturn
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Impact of the crisis and measures adoptedSecond period
July 2010 stress tests (1)
The stress tests in Spain were marked by the high degree of transparency and the severity of the parameters applied
There was capital available in Spain, via the FROB, for those banks that didnot pass the tests and that could not obtain private capital
There were some savings banks that did not pass the stress tests
This was a reflection of the severity of the tests, both regarding the parameters and
the degree of coverage, since virtually the entire banking sector was included
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Impact of the crisis and measures adoptedSecond period
July 2010 stress tests (2)
The stress tests were very transparent
All listed banks and all savings banks weretested, entailing around 90% of the Spanishbanking sectors total assets
In addition to publishing bank-by-bank datausing the common Europe-wide formatdefined, highly detailed information waspublished for each institution taking part in theexercise
Portfolio composition
Provisioning and fiscal impact Dividends and fair value of merger processes
Breakdown of public aid received before thetests
Stressed benchmarkscenario
Adverse stressed scenario
million % assets million % assets
Credit assets
Financial institutions
Corporates
Property developers andforeclosuresSMEs
Mortgages
Other retail
Impact sovereign risk and others
GROSS IMPAIRMENT
PROVISIONSSpecificGeneral
NET OPERATING INCOME AND CAPITAL GAINS
TAX IMPACT
NET IMPAIRMENT
Stressed benchmarkscenario
Adverse stressed scenario
INITIAL SITUATION 2009 million % RWA 2009 million % RWA 2009
Tier 1 dic 2009
FINAL SITUATION 2011 million % RWA 2011 million % RWA 2011
Net impairment
Dividend, fair value of mergers and others
Tier 1 Dec 2011 without F ROB
Committed FROBTier 1 Dec 2011
Additional capital to reach Tier16%
Stressed benchmarkscenario Adverse stressed scenario
DGF Support
Committed FROBAdditional Capital to reach Tier1
6%TOTAL
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Impact of the crisis and measures adoptedSecond period
July 2010 stress tests (3)
... and demanding in terms of the
parameters used:
Decline of 2.6% in GDP in the period
analysed, on top of a decline of 3.6% in 2009
Highly significant reductions in collateral
values
28% for finished houses,
50% for houses under development
62% for land
Price developments have been better in reality than those considered in the stress tests
Reduction in profits before provisions which, for savings banks, resulted in a net operatingincome before provisions that was 37% lower than the average over the past 20 years
In the US stress tests, the profit margin was 15% lower than the average margin for the past 20years
40
50
60
70
80
90
100
110
120
130
0 1 2 3 4 5 6 7 8 9 10Years following the peak in housing prices
Housing prices in real terms. Comparison of current andprevious price cycles. 100=price obse rved in the peak of eachcycle
1979
1991
2007. Actual
2007. Adversescenario (July 2010 )
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The severity of the parameters translates into potential high losses in theadverse stressed scenario
The assumptions considered in the adverse scenario resulted in high levels of lossescompared with those recorded in other past crises and with those obtained in the USstress tests
Impact of the crisis and measures adoptedSecond period
July 2010 stress tests (4)
0
2
4
6
8
10
12
14
Korea(97-99)
Finland(90-93)
Sweden-Norway(90-93)
UK -present(07-09)
Spain st. testsavings banks
(potencial losses)
Spain st. test(potencial lossesnet of provisions
and net operatingincome)
Losses as a percetage of risk-weighted assets, %
0
2
4
6
8
10
12
14
US SCAP Spanish savings banks
Potencial losses/RWA, %
SOURCES: Bank of England, US SCAP and BdE
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Impact of the crisis and measures adoptedSecond period
Tightening of provisioning (1)
In Spain, provisioning rules are straightforward and transparent
The regulator sets minimum criteria , and their compliance is verified by the supervisor and by banks external auditors
In other countries, provisions are decided by the banks with the approval of the external auditors
For assets that are collateralised, significant haircuts are applied taking the lowerbetween the loan value and the appraisal value (market value)
It is not the ordinary practice to apply these haircuts; rather, market value is considered
In summer 2010, provisioning rules were tightened for two reasons , at a time
when banks were already assuming high provisions as loans went into arrears: To accelerate the coverage of non-performing loans
To give banks incentives to place foreclosed assets or assets received in payment of debt on themarket
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Impact of the crisis and measures adoptedSecond period
Tightening of provisioning (2)
Acceleration of coverage requirement : the portion of the loan not covered by the valueof the collateral must be 100% covered within one year
Realistic haircuts in collateral values
At the lower of the loan value and the appraised value:
Borrowers principal dwelling: 20%
Commercial and industrial premises and multi-purpose offices: 30%
Other finished houses (real estate developers): 40%
Developable land parcels and building plots (real estate developers): 50%
Incentives are established for banks to take foreclosed assets off the balance sheet Provisions of 10% are set at the time of foreclosure based on the lower of the loan value and the appraised value.These rise to 20% and 30% after remaining for 12 and 24 months on the asset side of the balance sheet
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Provisions and asset valuationDiscussion on asset valuation turns on two aspects: losses already incurred and
potential losses in a stressed scenario
The losses already incurred are covered by provisions
Neither on the basis of their volume (which accounts for nearly a 9% of GDP) nor of their calculation (transparent, regulated and prudent) can it be sustained that there is a shortfall in therecognition of losses incurred
In the case of potential losses under stressed scenarios, scenarios with a very lowprobability of occurrence are considered. In fact, the July 2010 stress testing scenarioshave not materialised
One of the key variables in these exercises is the assumption on loss given default (LGD), whichis affected by the LTV and by the assumptions of a fall in price of the underlying assets
Not to take into account the LTV means adopting the assumption, which is not sustained by theevidence available, that this LTV is 100%
Impact of the crisis and measures adoptedSecond period
Tightening of provisioning (3)
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Provisions and asset write-downs in savings banks real estate developers andconstruction portfolio:
For savings banks, in the case of their exposure to the real estate developers and constructionportfolio (217 bn), a 46% of this (100 bn) is classified as potentially problematic. This amountcomprises:
Standard loans under surveillance : 28 bn
Doubtful loans: 28 bn
Foreclosures: 44 bn
The specific provisioning set aside at present accounts for 31% of this potentially problematic exposure
If the general provisions are added, coverage would rise from 31% to 38%
Impact of the crisis and measures adoptedSecond period
Tightening of provisioning (4)
Impact of the crisis and measures adopted Actualizar nombres
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Impact of the crisis and measures adoptedSecond period
Amendment of the Savings Bank Law
Allows savings banks to issue top-quality capital, facilitating their access to the capitalmarkets
Contributes to making their management andgoverning bodies more professional
Subjects savings banks to greater marketdiscipline
Culmination of the process designed inthe FROB Royal Decree
From 45 to 17 savings banks
Ibercaja IbercajaKutxa KutxaCaja Vital Caja VitalC aja O nt in ye nt C aja O nt in ye ntCaja Pol len a Caja Pol lena
45 Savings banks 17 Savings banks
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Impact of the crisis and measures adoptedThird period
In the summer the wholesale marketsreopened for Spanish banks,
but economic weakness persists andthe pressure on Irish debt generatescontagion effects. Potential access towholesale markets is once again madeharder
More transparency
Increase in capital requirements (8%-10%) with the backing of the FROB iffunds are not obtained in the market
Summer 2007 December 2009 December 2010
LehmanBrothers
Sovereign debtcrisis: Greece
Sovereign debtcrisis: Ireland
Economicdownturn
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Impact of the crisis and measures adoptedThe banking sector at end-2010
Recognition of problems by banks (1)
Since January 2008, the bankingsector has recognised andassumed asset impairment lossesfor an amount equivalent to nearly 9% of GDP
53 bn of net specific provisions that lowerprofit against the P&L accounts
Additional 16 bn using the generalprovision, in force since mid-2000
Additional 22 bn of specific provisionsagainst reserves for institutions undergoingrestructuring through the FROB
53
16
22
Already consolidated provisions since Jan-08. Depositinstitutions, bn
Specific provisions against reserves forinstitutions in restructuring processes
Reduction in gene ral provisions
Net specific provisions that lower profit
against the P&L accounts
39
52
Banks
Savings Banks
Already consolidated provisions since Jan-08, bn
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Spanish institutions have also reinforced their capital over the course of this period
The increase in the excess of Tier1 capital relative to the requirements accounts foraround 3.7% of GDP
Thus, adding of accumulated provisions and the excess of capital over the minimumalong this period represent nearly a 13% of GDP
Impact of the crisis and measures adoptedThe banking sector at end-2010
Recognition of problems by banks (2)
7.6
9.5
Dec-07 Dec-10 E
Tier1 capital of Spanish deposit institutions, %
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These corrections in asset value are largely due to the loans related tothe real estate developers and construction sector, whose doubtful assetsratio is growing significantly more than in the rest of the portfolio
Impact of the crisis and measures adoptedThe banking sector at end-2010
Credit portfolio, construction and real estate developers (1)
0
5
10
15
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10
Doubtful loans ratio. Deposit institutions.Latest data: Sep-10, %
TOTAL DOUBTFUL LOANS RATIONON-FINANCIAL FIRMS, EXCEPT CONSTRUCTION AND REAL ESTATECONSTRUCTION AND REAL E STATE DEVELOPMENT HOUSEHOLDS. HOUSE PURCHASEHOUSEHOLDS, EXCEPT HOUSE PURCHASE
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However, this portfolio segment, where the problems are concentrated,accounts for 22% of savings banks credit to the resident private sector,including foreclosures
NOTE: The banks depicted account for close to 90% of deposit institutions totalassets
p pThe banking sector at end-2010
Credit portfolio, construction and real estate developers (2)
05
10152025303540
20 30 40 50 60 70 80% Non-performing loans ratio of
construccion and real estate sector
% loans to construction and real estate over total loans to firms
Dispersion of institutions by the weight of loans to construction
and real estate development and by the non-performing-loansratio of that sector. Sep-10
0
20
40
60
80
100
% over total loans,including
foreclosures
% over consolidatedassets
Banks
0
20
40
60
80
100
% over total loans,including
foreclosures
% over consolidatedassets
Savings banks
Construction and real estateincluding foreclusuresOther
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Despite the real estate marketadjustment in Spain, the retail mortgageportfolio does not pose a materialproblem
Its default rate is, and has historicallybeen, low
The portfolios average LTV is 62%,and is distributed uniformly acrossinstitutions
The mortgage business in Spain isstraightforward and banks haveadditional guarantees on the mortgagedasset
Impact of the crisis and measures adoptedThe banking sector at end-2010
Retail mortgage portfolio
42,52
8,475,47
Dec-92
Dec-93
Dec-94
Dec-95
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Doubtful a ssets ratio. Deposit institutions, %
Mortgages Credi t to the r es ident p rivate sec to r
0
10
20
30
40
50
60
7080
90
LTV
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P&L accounts will remain underdownward pressure in the comingquarters
The cost of funding remains high
Although it places downward pressure onspreads for new business, it passes throughslowly to average rates and, therefore, to net interest income
This is a parsimonious process that is only worrying if these trends hold in the medium
term
Impact of the crisis and measures adoptedThe banking sector at end-2010
Profitability (1)
0
1
2
3
4
5
6
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Net interest income/ATA. Deposit institutions, business inSpain, %. Data to Sep-10
Net interest income
Financial revenue
Financial costs
0
1
2
3
4
5
6
7
Dec-06
Jun-07
Dec-07
Jun-08
Dec-08
Jun-09
Dec-09
Jun-10
Dec-10
Weighted marg inal interest rates. Deposit institutions, %.Data to Dec-10
Assets
Liabilities
Spread
12-month Euribor
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In any event, banks core
business remains profitable lookingahead
Spanish banks are efficient, and the mergerand concentration processes via cost savings have a positive influence on this dimension
Institutions, and savings banks in particular,have a high franchise value and productcross-selling capability, underpinned by theirproximity to customers
Activity will become more dynamic as therecovery in the economy gathers pace (recallIMF forecasts)
NOTE: Institutions represented account for more than 94% of depositinstitutions total assets
p pThe banking sector at end-2010
Profitability (2)
-0,5
0
0,5
1
1,5
2
2,5
3
Each column represents an institution
ROA and ROA without provisions, Sep-10, %
ROA withoutprovisions
ROA
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As indicated, the sovereign debt
crisis in the euro area has resultedin the wholesale funding marketsclosing
Spanish banks have resorted toEurosystem funding to a greater extent
than in the past But after peaking in the months prior to
the publication of the July 2010 stresstests, the situation has tended tonormalise
The data for January reflect a further reduction in applications for Eurosystemlending
which confirms that when the opportunity arises, Spanish banks tap the wholesalemarkets for funding
p pThe banking sector at end-2010
Funding (1)
NOTE: Net lending is defined as the difference between the liquidity injectedand the funds deposited in the liquidity absorbing operations
0
5
10
15
20
25
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10
Gross lending from the Eurosystem, %,compared to Spain's capital key. Latest
data: Jan.2011
0
10
20
30
40
Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10
Net lending from the Eurosystem, %,compared to Spain's capital key. Latestdata: Jan.2011
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Notwithstanding the fact banks should continue to manage their businessappropriately, the structure of savings bank funding shows that stabledisposable funding stands at 100.1% in relation to stable funding needs
p pThe banking sector at end-2010
Funding (2)
Net Stable Funding. Sa vings banks' balance sheet, bn
Customer loans 870 Own funds 47
Investments 30Wholesale funding with maturity of morethan 1 year 273
Other net assets 5 between 1 year and 2 years 62between 2 and 5 years 109more than 5 years 102
Retail funding 590Stable funding needs 904 Stable funding sources 911
Liquid securities 117
Wholesale funding with maturity of less
than 1 year 129Balances at central banks 19Total 1040 Total 1040
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Savings banks
41
Third period: new measuresTransparency (2)
The information already published by Spanish savingsbanks is very detailed, inparticular concerning theirconstruction and real estatedevelopers portfolio
Note. Savings banks have published a total figure for exposure to this sector of 205 billion, aggregating the data submitted by each institution,instead of the 217 billion reflected in this table. The difference is due to divergent data presentation criteria. Thus, for example, in this table undrawnloans, such as financial guarantees and drawable credit, are included, and the amounts for foreclosures are given as the value of the loan at the timeprior to foreclosure.
Exposure% of
exposure% of totalcredit risk
Credit risk 173 80% 18%Standard 117 54% 12%
Finished housing 50 23% 5%Housing under construction 26 12% 3%Land 22 10% 2%Other 19 9% 2%
Standard under surveillance 28 13% 3%Finished housing 7 3% 1%Housing under construction 4 2% 0%Land 10 5% 1%Other 7 3% 1%
Doubtful 28 13% 3%Finished housing 9 4% 1%Housing under construction 5 2% 1%Land 7 3% 1%Other 7 3% 1%
Foreclosures 44 20% 4%Finished housing 18 8% 2%Housing under construction andother 3 1% 0%Land 23 11% 2%
TOTAL EXPOSURE 217 100% 22%
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Third period: new measuresTransparency (3)
The figure for savings banks total exposure to the construction and real estatedevelopers sector (217 bn) is lower than the figure published at the time of theJuly 2010 stress tests (303 bn). The reasons are:
Changes in the portfolio between July and December (-10 bn)
The remainder is a result of the process of greater transparency set in place from thatdate by the Banco de Espaa and by institutions involving the use of stricter methods ofallocation to each portfolio, more closely in line with the actual exposure and the nature ofthe loan and the customer. From the stress test figure, then, the following should bediscounted:
27 bn allocated to civil engineering and public works
16 bn allocated to large corporations collateralized with real estate assets
33 bn allocated to SMEs collateralized with real estate assets
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To compare the figure of 217 bn for exposure to construction and real estate developers
with that published quarterly in the Banco de Espaa Statistical Bulletin (SB) (230 bn inSeptember 2010, the latest figure available), the following should be taken into account:
The SB does not include foreclosures (44 bn) nor financial guarantees and drawable credit (14 bn)
However, the SB does cover real estate developers and construction in a broad sense of the term,therefore including an amount of 66 bn corresponding to activities not strictly related to housing
construction
Finally, from September 2010 to December 2010, there was a change in the portfolio of the order of-5 bn
The information published by the Financial Stability Report (FSR) followsanalogous criteria to those of the SB
In fact, Box 2.3 of the March 2010 FSR indicated that the data published there on construction andreal estate developers was an upward biased estimate. In particular, the Box stated It has beendecided to treat both sectors jointly because the boundaries between the two, in terms of statisticalclassification, are occasionally blurred
Third period: new measuresTransparency (4)
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The latest FSR has published an amount of potential problem exposures for total depositinstitutions of 180.8 bn (June 2010)
These data represent 35.2% of the total exposure of Spanish deposit institutions to real estatedevelopers and construction as at June 2010
The level of coverage, including generic provisions, was 33%
The data published by the savings banks (December 2010) show:
Potential problem exposures of 100 bn
This level of potential problem exposures represents 46% of the total exposure to construction and realestate developers
Its level of coverage at December 2010, including general provisions, is 38%
Third period: new measuresTransparency (5)
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Third period: new measures New Royal Decree-Law (1)
New capital requirements
Credit institutions are required to have acore capital ratio of at least 8%
This draws closer to the Basel III-2013 core
capital definition,
tightening most significantly the minimumrequirement
Such tightening is not subject to valuejudgment: it will depend on (1) starting
position and (2) minimum capital requirement
0%
2%
4%
6%
8%
10%
12%
New measuresSpain
Basel III-2013 Basel III-2019
Core capital requirements under thenew Spanish regulations compared withwhat Basel III-2013 will demand
Conservationbuffer
Core EquityCapital
Definition of core capital: new measures approved
+ Paid-up capital+ Reserves+ Share premium+ Positive results for the year (% foreseeabl e devoted to reserves)+
+ Minority interests+ Subordinated debt compulsory convertible into common shares (*)+ FROB support
- Own shares- Losses for the year- Goodwill- Other intangible assets-
-
(*)
Other net balances of other comprehensive income
Compulsory conversion into shares at the latest by 31st December2014; pre-fixed conversion equation; subject to is suer discretionregarding coupon payment when its solvency situation requires it;and admissible as own funds for accounting purposes
Unrealised gains on fixed income and equity in theavailable-for-sale financial assets portfolio
Unrealised losses on fixed income and equity in theavailable-for-sale financial assets portfolio
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New capital requirements
The requirement of a core capital ratio of 8% will be raised to 10% for thosecredit institutions meeting the following two conditions:
They have a wholesale funding ratio of over 20%
An amount equal to or greater than 20% of their share capital or voting equity has not been placed with third parties
For all purposes, the FROB acts as a backstop as from the approval of the RoyalDecree-Law
Banks that cannot raise capital on the market will resort to the FROB
To all intents and purposes this means that, further to the enactment of the Royal Decree, all Spanish banks will operate with a core equity capital ratio of at least 8%
Third period: new measuresNew Royal Decree-Law (2)
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New capital requirements
Once institutions have reached the new minimum requirements (8%-10%)depending on each particular case, if their core capital falls below minimumrequirements at a maximum of 20%, then
there are certain restrictions in terms of profit distributions in the form of dividends,variable remunerations, retribution of preference shares or share buy-backs
in line with the idea of the conservation buffer in Basel III
but requiring a higher minimum requirement (at least 6.4%) with respect to Basel III-2013 (4.5% in this case)
Third period: new measuresNew Royal Decree-Law (3)
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The new measures will have Spanish credit institutions operating with
very high core capital levels
The requirements of higher capital ratios imply an extra cushion for credit institutions: intimes of uncertainty this is the best way to reinforce market confidence
The requirement is based on core capital because, after the approval of Basel III, core
capital is clearly the new market and regulatory reference
A much higher core capital requirement (8%-10%) with respect to that approved bythe Basel Committee for year 2013 (3.5%) means Spanish institutions are operating wellabove this international minimum requirement
The franchise value of savings banks, which is particularly strong in their traditionalregions of origin, is retained
Savings banks become mere holders of a stake in the bank
Third period: new measuresNew Royal Decree-Law (4)
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Third period: new measuresNew Royal Decree-Law (5)
SavingsBank 1
SavingsBank 2
SavingsBank n
IPS(Bank)
IPS(Bank)
Capital
SavingsBank 1
Savings
Bank 2
SavingsBank n
SavingsBank 1
SavingsBank 2
SavingsBank n
Commercial Bank
Deepening and simplification of restructuring process
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How high are the new capital ratios?
The Royal Decree-Law does not set a new stress exercise, but raises the ratio withwhich institutions must operate: it is a purely arithmetical exercise
By way of illustration, the stress tests in the United States, in Europe and in Spainentailed reductions in starting capital ratios which, if applied directly to the core ratio
Spanish institutions have to maintain, would still leave Spanish banks with a comfortablecapital cushion
Third period: new measuresNew Royal Decree-Law (6)
1.1 1.0 1.01.8
3.7
0
2
46
8
10
12
EuropeanST Tier1
USA STTier1
USA STCore
SpanishST Tier1
Spanishcajas ST
Tier1
Impact on capital ratios of the stress tests
Initial ratio
Final ratio (wi thout
after-ST public aids)
Difference
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The recently approved Royal Decree-Law entails an increase in the corecapital ratio to 8%, and to 10% for those credit institutions that evidence
greater dependence on wholesale funding and which have not placed an amountequal to or greater than 20% of their share capital or voting equity with thirdparties
The core capital definition draws closer to the Basel III-2013 definition of core capital, butraising capital requirements above the figure stipulated under Basel III (which in 2013 is 3.5%)
Moreover, this bolstering of solvency comes after
Institutions have made provisions equivalent to nearly a 9% of GDP and have increased their capital
They have recapitalised under the savings bank merger and concentration processes that have applied tothe FROB, for an amount of 11.6 bn
Provisioning rules have been tightened , in particular concerning the valuation of collateral (applying severehaircuts) and those that have to be set aside in the case of foreclosures
Total transparency has been required of banks regarding their exposure to the real estate development and construction sector, reinforcing what was already done in the July 2010 stress tests
Third period: new measuresNew Royal Decree-Law (7)
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Next steps
Having to apply to the FROB involves several consequences for banks
The FROB will acquire ordinary shares , or other convertible securities, in such banks
If a savings bank were in this situation, this would mean that it would have to transfer its activity to a bank
The FROB would sit on the governing body of the bank issuing shares. It is not an interventionof the institution, but to be sure that recapitalisation plans involving public funds are fulfil by institutions
The bank must submit a recapitalisation plan that has to be approved by the Banco de Espaa,
and it mustinclude a business plan
with efficiency, profitability, leverage and liquidity targets
Conclusions
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The results of the restructuring and write-downs made to date have been substantial
The new measures adopted are aimed atdispelling any remaining doubts about thesoundness of the Spanish banking sector,
whose future outlook, like that of theSpanish economy, cannot be derived in a linearfashion from the current situation
The Spanish economy, as the IMF projections show,has capacity to grow
And the core business of Spanish banks is profitablein the medium and long term
0.0
0.5
1.0
1.5
2.0
Dec-01 Dec-03 Dec-05 Dec-07 Dec-09
ROA, %. Last data: September 2010
ROA
ROA ex-provisions
-1-0.5
00.5
11.5
22.53
3.54
Germany
Spain
France
Italy
Euro Area
Year-on-year change in GDP. IMF forecasts, %
2010
2011
2012
2013