Spain: The Hole In Europe's Balance Sheet

http://www.youtube.com/watch?v=jaLDoWqIq2M

 

http://www.dofollownet.com/Economy/Movie_trailer_Lets_Make_Money

The movie features a really good view into the spanish real estate bubble

 

add to the mix that fact that tourism industry has slowed down.

 

Surprise! Spanish banks are not hiding their losses!

So says Iberian Equities AV in their retort to a now infamous piece of research by Variant.

In a note titled “The holes in Variant’s research” Iberian Equities analyst Iñigo Vega takes on Variant’s “Spain: The Hole In Europe’s Balance Sheet” Aug. 18 piece, arguing that the country’s banks may be intentionally hiding their losses, going through the thesis point by point.

And despite the bullishness that one might infer from Iberian Equities’ name, Vega is eager to point out that he is not necessarily blind to the structural challenges faced by Spain. The brokerage’s latest industry reports, “Prepare for a hard landing” and “Still halfway through the cycle”, we are told in the note, confirm that Iberian still believes things will get worse for Spain’s banks before they get better.

Without further ado then, here are the kernels of Vega/Iberian Equities’ counter-argument:

€470bn in loans could go bad — Far too simplistic

Variant picks-up a classic wild-card to spice-up the report. Specifically, they say most of the €470bn in outstanding loans to developers/construction (50% of Spain’s GDP) could go bad. The report forgets to mention- however- that a chunk of the €323bn in outstanding loans to developers does not necessarily involve residential lending but commercial lending (which is relatively safe in Spain , in our view). It does not say either that a not-low percentage of construction activity in Spain involves public works, so a proportion of the construction-related debt (€141bn) should be attached to that public sector accordingly. Also it is worth considering that residential work-in-progress in Spain — one of the biggest contributors to the €320bn figure — is generally collateralized (with Spanish major developers reporting LTV of 50-65% approx). Factor-in these and the final loss on this portfolio should be a fraction of what Variant claims. In our models, we assume a 15% peak NPL ratio on Developers (7.6% in 1Q09) and a 10% NPL ratio on Construction loans (6.7% in 1Q09). Another factor to bear in mind is the recent trend in lending to developers (outstanding loans up €5bn in 1Q09 despite the large volume in asset swaps). First the €3bn increase compares with a net fall in the system’s total corporate loans of €2bn. Secondly, we think this shows the high-degree of progress in some of the developments, so assuming a value of zero in many to be- finished units is far too much. Anecdotally, we have also met a large number of decent-size Spanish developers over the last few months that are in good financial shape.

Getting a boost from accounting charges in 1H09- Wrong

Yes, the Bank of Spain changed last July the interpretation of the provisioning rule on some mortgage loans. Now the rule is more in line with the rules applied by most European/US banks (where provisions tend to match the expected loss as opposed to the frequency of losses). However, the measure has had zero impact on the system’s P&L hitherto. The only listed institution that has applied the rule in 2Q09 (Banco Santander) re-classified the release (€270m) as an additional specific provision. Variant claims however- ” the change in rules has allowed Spanish institutions not to lose money this year”.

Not marking loans to market- Come-on!!!

Variant claims Spanish banks are not marking their loan books to market. Non-performing loans in Spain (4.6% of the system’s loans by the end of Jun’09) are marked-down according to different provisioning calendars set by the Central Bank. For non-mortgage loans, NPLs are provisioned at the end of year 2. The majority of mortgage loans (40% of loans or two thirds of mortgage loans) have been - until the BoS made changed the interpretation of the rule - also 100% provisioned by year 2. Only a small fraction of low -risk mortgages (20% of loans) are provisioned according to a long calendar (100% provision by year 6). By international standards, Spain’s provisioning calendars are quite strict especially considering >60% of loans have a mortgage collateral.

If what Variant really suggests is marking to market the whole loan portfolios the same way CDOs are, then Santander’s recent tender offer for its own bonds is self-explanatory, in our view. Basically, Santander is offering to buy some of its own bonds at a 15% discount to par value. And some of these loans are of the lowest credit quality within Santander’s Spanish credit portfolio. If we exclude the quite-particular UCI vintages, the discount offered by Santander goes down to 10%. This discount suggests, 1) Santander is simply taking advantage of price inefficiencies in illiquid securities, 2) Santander is happy to buy most of its own outstanding paper at a 10% discount, a fraction of the discount seen in the markets a few months ago. Hence it would have been non-sense to mark-to-market the whole loan portfolio using illiquid bond prices- some of the lowest credit quality - as a market reference. Or if marked-to-market then, they would need a huge upgrade now.

The full Iberian Equities note is available in The Long Room and sits side-by-side with the Variant piece.


http://ftalphaville.ft.com/blog/2009/09/02/69596/surprise-spanish-banks-are-not-hiding-their-losses/

 

Man, I would love to see you speaking a foreign language... Don't be cynical.

Btw, I think Emilio Botin has a horrible accent, but I guess he stated learning english in a well advanded age.

 

they do nothing but eat tapas and take siestas. lazy bastards

 

Wow, really stunning...

How did you come to that conclusion? How can you generalyze like that?

Really amazing!!