How strong are Spanish banks?

By: Jaime Pozuelo-Monfort

The same day that the rating agency Standard & Poor’s warned that European banks may be under pressure and facing severe conditions, Banco Popular, the third largest commercial bank in Spain and fifth largest financial institution in the country announced its acquisition of a certain amount of equity in realtor Colonial. In the meantime Spain’s surplus in the first three months of the year went down by 50% compared to a year ago, from 0.6% to 0.3% of GDP, anticipating the slowdown. Pedro Solbes, Spain’s Finance Minister, recently announced a 2.4% GDP growth forecast for 2008 versus the 1% suggested by The Economist. Again there are significant differences about perceptions inside and outside Spain.

Banco Popular has for decades now been Spain’s most profitable bank and one of Europe’s success stories in banking. The bank has a very conservative business model, only increases its network by organic growth in lieu of acquisition, and has a board of directors that controls a majority stake in the capital. As a result and although it is a very appealing target for mergers and acquisitions, it is very unlikely to be purchased without the approval of the board of directors, who keep tight control on the bank’s ownership.

La Caixa and Banco Popular are the two largest lenders to Colonial, a company headed by Luis Portillo. Colonial is one of Spain’s most prominent realtors and has suffered the consequences of the slowdown in the real estate sector. The company recently acquired 15% of FCC, Spain’s second constructor after ACS, which increased its debt. The inability of realtors to service their debt has sunk their stock price and brought about serious concern on the banking side, that has much exposure to credit granted to promoters. Luis Portillo remains the largest shareholder with a 29.8% of the equity. Natixis, the French investment bank, recently acquired a 5.39% of the capital. In the last six months Colonial has lost 67% of its stock value, falling from about 3 Euro to 1 Euro per share. Colonial’s debt amounted to 8.9 billion Euro as of year end 2007. Natixis and La Caixa/Popular's acquisition is linked to the group’s inability to service its debt.

Spain’s financial institutions are to a certain degree exposed to the performance of the real estate sector. Much of the credit growth has been related to promoters and realtors in the last few years. The slowdown in the real estate activity coupled with the liquidity crunch have built up a not very promissory environment in which realtors have to renegotiate their increasing debt burdens and promoters are massively declaring bankruptcies. Some of the construction firms with a large stock of unsold apartments are discovering the rental market, a very underdeveloped market in Spain that only devotes 8% of the apartment stock to rentals.

Two more indicators point out the growing concern of the Spanish economy. Madrid’s office rentals dropped by 45% during the first quarter of 2008 compared to the same period in 2007, although Barcelona’s office rentals increased by 14%. Constructors and realtors concentrate 47% of the total debt of non-financial quoted companies in the Spanish stock market. Constructors are less likely than realtors to suffer from the real estate crunch. They are not only more diversified into energy and water, but also more diversified internationally through its infrastructure management daughter companies. Ferrovial operates BAA and owns a majority stake in Cintra. ACS has acquired 25% of Germany’s largest construction company.

Spain is unlikely to recover from the real estate slowdown until 2010. The recent measures undertaken by Zapatero and Solbes will only impact the economy with a short-term upwards shock of 20 basis points in GDP growth. The nomination of Miguel Sebastian as Industry and Trade Minister might help implement a new economic growth model for Spain going forward. Sebastian, a PhD in Economics from the University of Minnesota, is also in good friendship with Premier Zapatero and was his chief economic advisor in the previous four-year administration.

All in all the so far strong banking sector is likely to suffer from the slowdown in the real estate sector. The recovery will take long and drag the economy for at least two years. The current emergency package is only likely to have a short-term effect on the economy. More drastic reform is necessary if Spain intends to tackle some of its challenging structural anomalies, such as the high temporary employment rate, the rigidities in its labor market, and its lack of productivity growth, innovation and entrepreneurship.

 

This article originally appeared in www.5spaniards.com

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