ARE SPAIN'S BANKS SAFE? Maybe not as much as it's often told:
Spain's property woes and economic downturn finally may be catching up with the country's two largest banks, Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA.
The big banks have remained profitable throughout the financial crisis despite the bursting of the housing bubble in Spain, high unemployment and other problems. One reason: the government's strict requirements for Spanish banks to maintain high reserves against bad loans, in part a response to a previous property downturn in the 1990s.
But now there is concern whether these cushions can withstand the impact of an increase in nonperforming loans. As these mandatory reserves wane, the banks' profits could be hit by the same economic and real-estate-related losses that have dogged banks in the U.S. and Europe.
"Having outperformed the sector during the credit crisis … recent results cast doubt over the adequacy of generic reserves to absorb future losses," said Barclays Capital analyst Tom Rayner in a recent note. Barclays ranks the banks "underweight."
Both Santander and BBVA maintain that their provisions are adequate and in compliance with the central bank's rules.
At the same time, some analysts have raised questions about whether the Spanish banking sector in general is underreporting problem loans, by agreeing to loan modifications that help borrowers make payments before the loan is officially categorized as delinquent. Recent data from Spain's National Statistics Institute show a 55% rise in mortgage "novations," or changes to the terms of a mortgage, to 435,835 in 2009, for the sector.