Spanish Bank Funding Pressure Unlikely to Ease Soon, Says Fitch

High funding costs and patchy access to markets will be key challenges for Spanish banks for some time, adding to the pressure on earnings from stricter impairment charges, higher capital requirements and a challenging operating environment, according to Fitch Ratings.

While the large Spanish banks have issued debt in Q112 on the back of the European Central Bank’s (ECB) three-year lending programme, concerns over the Spanish sovereign have created renewed pressure on both funding costs and access. The yield on 10-year government bonds briefly topped 6% yesterday, pushing up yields on bank debt. As in other countries, the link between sovereign and bank funding costs is strong. This is exacerbated in Spain because of concerns regarding the future evolution of the economy and the banking sector.

Given that funding pressures have expanded beyond the peripheral and southern eurozone countries, we believe they will take time to calm down. Even then, wholesale funding costs are likely to remain high relative to their pre-crisis levels.

These funding challenges will keep pressure on banks’ net interest margins and limit their ability to expand their loan books at a time when the domestic economy is struggling and the banks are also having to juggle new real estate impairment rules and tougher capital requirements.

The higher coverage requirements on real estate assets will result in the large Spanish banks reporting lower earnings in 2012, while smaller, domestically focussed banks could report losses if they don’t register capital gains on asset sales. Internal capital generation is already hindered by narrow margins and low business volumes, limiting the scope to make provisions without affecting net income.


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