Today has begun with the news that Bankia of Spain has seen its share trading suspended by the Spanish regulator as rumours circulate that she will need yet more support from the Spanish taxpayer. This is a moot point in several ways. Firstly Bankia is a bell-weather for the state of both the Spanish housing and its banking industry. Secondly it is another potential burden for Spain itself at a time when its burdens are rising and causing increasing concern. And thirdly it is an example of Spain’s preferred “rescue” strategy of merging struggling cajas (savings banks) and in fact its creation involved the merger of seven of them.
What do you think Shaun?
Back in my article on May 8th I pointed this out about Bankia’s situation.
So Spain has a problem as everyone with any sense will realise that Bankia needs more that the 7 to 10 billion Euros of extra capital being mooted. even worse it will focus attention on the other Spanish banks which need capital.
This fed into a regular theme where nations bail out banks with as little as they can get away with rather than enough to fix the problem. We saw this happen time and time again in Ireland where every couple of months or so we got reports of a further deterioration. The errors in such a tactic are manifold as both their credibility and their reputation for honesty disappear southwards.
The Official View
Only on Wednesday in response to enquiries that Spain had still not specified how much the bail out of Bankia would cost her Finance Minister Luis De Guindos told the Financial Times this.
Bankia-BFA was a unique case in the Spanish financial system, because of its high market share, high exposure to real estate, higher than the sector average, and the capital it needed as result of the two [banking] reforms
I am afraid the use of unique makes it sound like Anglo-Irish Bank. There are two main problems with doing such a thing. Firstly every one knows that Anglo collapsed and secondly that other Irish banks collapsed too as it proved to be an extreme case but not a unique one.
Echoes of Royal Bank of Scotland and a problem for bank shareholders
Bankia had a rights issue last summer as shareholders backed her with more finance. If we recall RBS having a large rights issue for shareholders (£12 billion if I recall correctly) and then collapsing only a few short months later I think you can see where I am heading. Indeed the conversion of state loans to equity raising Spain’s stake to 45% has of course reduced the position of shareholders which will get yet weaker as more money is required. They have already lost around 55% of the money put in at the time of the rights issue.
Never Mind there is going to be an independent audit
Oliver Wyman and Roland Berger are going to lead an audit of the Spanish financial system. Let me give you an example of Oliver Wyman’s work from 2006. This is about Anglo-Irish Bank (2010 loss 17.5 billion Euros).
Business lending, its largest and most profitable segment, has grown by 38 % annually over the last 10 years. A centralized loan approval process has helped the bank maintain high asset quality and minimize the risks of portfolio concentration.
Unfortunately I gather that this report which declared Anglo-Irish to be the best bank in the world in 2006 somehow disappeared from their website so I am grateful to both FT Alphaville and whoever sent them a copy.
In my opinion Oliver Wyman after that report should be excluded from future work on bank audits not given it. It finds itself in a similar situation to the ratings agencies where catastrophic failure does not appear to be a barrier to future work. Indeed in something of a perversion of good business it seems to have encouraged new work.
How Much will Bankia need?
Whilst Spain’s Finance Minister was talking of 9 billion Euros only on Wednesday even the Vampire Squid (Goldman Sachs) estimated 13.5 billion Euros! And the latest estimates are for 15 billion Euros.
Spain’s FROB (Fund for Orderly Bank Reconstruction)
If we look at its financial position we see yet another lifeboat which may prove unstable in a crisis. It’s original capital was 9 billion Euros which it calls “strongly capitalised” in fact so strongly that this was increased to 15 billion Euros in February! So yes another entry for my financial lexicon.
Again in a regular theme for the Euro area you may not be surprised to read that the extra 6 billion Euros has not actually been paid.
Lets us play nicely and give them the benefit of the doubt and with its leverage capacity of three times we see that the FROB has 45 billion Euros of lending capacity of which it has spent approximately 19.2 billion Euros. You may by now be getting the idea of why Spain wants to downplay possible bank bailout costs.
Indeed the margin between the amount of lending and the guarantee of 27 billion Euros by the Kingdom of Spain is thinning and disappearing. As it is incredibly unlikely that everything would be lost that is an amber light not a red one but the light will flash more brightly the more the 27 billion Euros is exceeded.
Also it is hard to put into words the stupidity of this.
This leverage capacity can be increased up to 6 times with the approval of the Ministry Of Economy and Competitiveness.
Yes we are back to my metaphor of an unstable lifeboat! If leverage of six times is okay why not have it now? Increasing leverage into a crisis is the sort of thing that Lehman Bros. ,Northern Rock, Anglo-Irish Bank and RBS managed, how did that work out? Waiting for a crisis and then increasing leverage would be an even worse tactic than managed by those lampooned as being on a “Ship of Fools”.
Spain’s banking system is seeing more bad debts
According to the Bank of Spain the percentage of bad loans rose to 8.37% in March which represented a further 4.15 billion Euros to give a total of 148 billion Euros. There remain doubts as to whether the full amount has been counted and of course there is Spain’s weakening housing market and economy.
Spain’s housing market
There is an ongoing debate about house price indices in Spain due to the way that Spain’s banks have dealt with problem loans/mortgages but we can learn somrthing from the latest data.
In the case of mortgages constituted for dwellings, the average amount was 103,782 euros, 7.8% less than in March 2011, and 1.0% less than that registered in February 2012.
It is not a perfect guide as we are excluding outright purchases but the fall in average mortgage size over the past year and month is hardly healthy.
The data also shows us that it is not only price which is being affected as the quantity of mortgages is falling too as Spain finds her weakened banks are willing to lend less and less in a familiar Zombie bank pattern.
The value of the mortgages constituted on urban properties was 4,351 million euros in March, indicating an interannual decrease of 42.5%. In dwellings, the capital loaned exceeded 2,586 million euros, 46.5% less.
Also we get a confirmation that cuts in official interest-rates do not seem to filter through to borrowers.
Mortgage interest rates
The average interest rate in March 2012 was 4.37%, indicating a 10.8% increase in the interannual rate, and 0.5% as compared with February 2012.
This theme fights with declines in real wages as the main theme of our times. Interest-rates may be cut in official terms but by the time they filter through market rates and reach the borrower they fall mush less and sometimes rise. This is one of the factors in what I described as a “liquidity trap” yesterday. In many respects what is called ZIRP (Zero Interest Rate Policy) is an illusion.
I find myself reviewing yet another Zombie bank today. But whilst the problems for Bankia are serious the real problems go wider. As we examine the Spanish banking industry we see dangers for the FROB and we see dangers of it being an unstable lifeboat which poses challenges for Spain as a nation. In some ways the Spanish authorities have been amongst the most enthusiastic supporters of kicking the can into the future and are suffering the consequences of the future being worse not better.
However let us think about Spain’s economy and bank lending. How much will Bankia be willing to lend and at what price? Once you begin to ask such questions you see an implicit cost of allowing Zombie banks and if history is any guide it will be a dragging anchor on an already weak Spanish economy. The price of failure to reform is a credit crunch which goes on and on and on…..