2
The new measures are designed to clean up institutions’ problematic exposures to construction and real estate developers in Spain - particularly land – from their balance sheets…
… as well as to consider potential migrations from normal to problematic portfolios
As a reminder, BdE considers as the following problematic exposures:
Doubtful loans: Loans in which some installment has not been paid for a period of more than 90 days, and those exposures in which there are reasonable doubts as to total repayment under the terms agreed
Substandard loans: Loans showing some general weakness associated with the fact they are to a specific troubled group or sector or if weaknesses are apparent in certain operations, even if these operations do not qualify individually for classification as doubtful or write-off
Asset foreclosures: Assets ownership goes to the credit institutions, as a result of the application of these regular tools in a crisis situation such as the present. Supervisors prevent them from becoming potential mechanisms to defer the recognition of losses
The new measures
3
The measures are applied to the stock of legacy assets at 31.12.2011 …
… and not to new operations
It could be expected that new operations are subject to stricter lending standards. In this respect, note that the 2010 reform of the CBE 4/2004 already included different considerations in order to incentivise higher lending standards by institutions to this sector.
– For instance, it is considered that, as a general practice, financing the acquisition cost of land for its further urban development will not be higher than the 50% of the minimum between the appraisal value and the price registered in the public deed (escritura pública)
To avoid a negative impact on new real estate sector activity in future cycles
The new measures
148
87
15
73
0
20
40
60
80
100
120
140
160
180
200
Normal (46%) Problematic (54%)
Land
Housing under development
Rest (Finished housing,54%; foreclosed retail houses, 21%; Personal guarantee and others, 25%)
Exposure to construction and property developers, €bn
4
The new measures are particularly focused on land because their key objective is to eliminate the major uncertainty affecting the Spanish institutions’ balance sheets, that is the uncertainty associated with the value of land
The new measures
Value?
148
87
15
73
0
20
40
60
80
100
120
140
160
180
200
Normal Problematic
Land
Housing under development
Rest (Finished housing,54%; foreclosed retail houses, 21%; Personal guarantee and others, 25%)
Exposure to construction and property developers, €bn
5
The new measures
Specific provisions to
consider incurred losses in problematic assets, particularly in land
Capital add-on to consider valuation uncertainties regarding land and housing under development
General provisions to take into account potential
migration from normal to problematic portfolio
The measures are based on three complementary tools:
105 105
50
0
40
80
120
160
New measures From Jan 2008 to June 2011
Cleaning-up of bank balance sheets
6
1. Specific provisions
2. General provisions
3. Capital add-on
A figure of €50bn means a 5%
of Spanish GDP … on
top of the cleaning-up
already conducted by institutions
The new measures
€ 25bn
€ 10bn
€ 15bn
€ 50bn
15% GDP
22
17
66
0
20
40
60
80
100
120
Provisions charged to institutions' P&L
Reduction in general provisions
Provisions charged to reserves of institutions undergoing restructuring
Cleaning uo of bank balance sheets, Jan 2008 to June 2011€bn
7
Additional specific provisions: €25bn
Land related assets: provisions for this type of assets represent a 76% of total additional specific provisions
The new measures
LAND CBE 4/2004
Foreclosed 10% 1st year; 20% 2nd year; 30% 3rd year
Doubtful – past due 90 days
Provisions = [loan – 50% haircut appraisal value of the collateral]; to be set in one year from 25% to 100%
Rest of doubtful Minimum of 25% of the value of the loan
Substandard Minimum of 10% of the value of the loan
LAND New Measures
60% of the value of the loan
31% coverage
ratio
60% coverage
ratio
8
Additional specific provisions: €25bn
Housing under development: provisions for this type of assets represent a 12% of total additional specific provisions
(*) The exposure on-going under development classified as substandard is around €2bn
The new measures
HOUSING UNDER DEVELOPMENT CBE 4/2004
Foreclosed 10% 1st year; 20% 2nd year; 30% 3rd year
Doubtful – past due 90 days
Provisions = [loan – 50% haircut appraisal value of the collateral]; to be set in one year from 25% to 100%
Rest of doubtful Minimum of 25% of the value of the loan
Substandard Minimum of 10% of the value of the loan
HOUSING UNDER DEVELOPMENT New Measures
50% of the value of the loan
50% of the value of the loan or 24% for on-going developments (*)
27% coverage
ratio
46% coverage
ratio
9
Finished housing and other real estate collateral
Foreclosed: the new measures apply the same treatment as CBE 4/2004, but increasing the value of the provisioning coefficients: 10% (1st year); 20% (2nd year) and 30% (3rd year) to 25% (1st year); 30% (2nd year); 40% (3rd year) and 50% (4th year)
Doubtful and substandard: the new measures eliminate the exceptions for minimum provisioning requirements, that are set at 25% for doubtful and 20% for substandard
Foreclosed housing from households (first residence)
The new measures apply the same treatment, but expanding one year the provisioning coefficients: 10% (1st year); 20% (2nd year) and 30% (3rd year) to 10% (1st year); 20% (2nd year); 30% (3rd year) and 40% (4th year)
Other with personal guarantee
For those classified as substandard the minimum provisioning coefficient goes from 10% to 24%
These changes give greater incentives to sell the assets in the market
The new measures Additional specific provisions: €25bn
Other different from land and housing under development: provisions for this type of assets represent a 12% of total additional specific provisions
10
The new measures To sum up: specific provisioning requirements
New operations: CBE 4/2004 criteria are maintained, but coverage requirements for foreclosed assets will be 40% for the 4th year
11
The new measures Additional specific provisions: €25bn
The increase in specific provisions means a direct increase in coverage ratios
29 27 31
4346
60
010203040506070
Total problematic portfolio Housing under development
Land
CBE 4/2004 New Specific Provisions
Loan Coverage Ratio, %
12
The new measures General provisions: €10bn
€10bn represents a 7% of the construction and real estate developers normal portfolio
This provision is established to take into account that there may still be the possibility that migration to the problematic portfolio of construction and real estate developers exposures which are currently classified as normal
Collective assessment for impairment
This is for specific portfolios
It is not a reform of the present Spanish dynamic provision
This one-off provision does not enter into the definition of regulatory capital
13
The new measures General provisions: €10bn
When a loan classified as normal is re-classified to the problematic portfolio, the amount accumulated in this fund of provisions can be used as much as necessary depending on the provisioning requirements resulting from the re-classification
These potential re-classifications will not have an impact on the P&L until the provision fund constituted as a result of the application of the new measures is completely depleted
14
The new measures Capital add-on: €15bn
The capital add-on is computed for land and housing under development classified in the problematic portfolio (*) over the ‚capital principal‛ minimum requirements of 8% / 10%
It takes into account valuation uncertainty regarding this type of assets increasing their coverage: +20pp for land related assets and +15pp for housing under development in the problematic portfolio (*)
(*) Except on-going housing under development classified as substandard that represents an exposure around €2bn
40
50
60
70
80
90
Land Housing under development
Specific provisions
Specific provisions + capital add-on
Coverage ratios considering the capital add-on, %
15
The new measures Summing-up
The total estimated amount of the new measures is €50bn of additional cleaning-up
Specific provisions: +€25bn; Capital add-on: +€15bn; General provisions: +€10bn
The measures also consider potential migration from the ‘normal’ portfolio to the ‘problematic’ portfolio
29 27 3143
46
605365
80
0102030405060708090
Total problematic portfolio Housing under development
Land
CBE 4/2004 New Specific Provisions New Specific Provisions + Capital Add-on
Coverage Ratio, %
16
The new measures
To compute a decline in the prices of the collateral compatible with a given level of coverage, it is necessary to consider the loan to value ratio (LTV)
EXAMPLE:
A loan of €60 where the value of the collateral is €100 has a LTV of 60%: that means that the value of the loan is protected against an initial decline in the value of the collateral of 40%
A loan of €60 with a LTV of 60% and a coverage ratio of 50% means that the implicit decline in the value of the collateral is 70%
100 60 30
INITIAL VALUE OF THE COLLATERAL
INITIAL VALUE OF THE LOAN
VALUE OF THE LOAN NET OF PROVISIONS
LTV = 60% Coverage Ratio = 50%
IMPLICIT DECLINE IN THE VALUE OF THE COLLATERAL = 70%
MAXIMUM DECLINE IN PRICES (VALUE = 0)
NO DECLINE IN PRICES
17
The new measures Considering the coverage of land related assets (80%) and the average LTV of the portfolio, the implicit decline in land prices is, on average, 87%
For housing under development the decline in the implicit value of the collateral is, on average, 82%
-82
-87
-100
-80
-60
-40
-20
0
Housing under development Land
At present
New Measures
Decline in the value of land and housing under development compatible with new coverage ratios, considering the average LTV of the portfolios %
18
The new measures The impact of the measures is a one-off: the objective is to eliminate uncertainty regarding banks’ balance sheets, and particularly the value of land related assets value
€50bn is the initial impact: in order to assess this figure it is necessary to take into account
Possible merger and acquisitions may change provisioning figures. Under IFRS
Need to identify the acquirer and the acquiree
The acquiree must put its balance sheet at fair value
Under this context, (part of) the adjustment will go directly against own funds
No final data for year-end 2011, and in fact all calculations are based on June 2011 figures
This is particularly relevant because many institutions have announced a strong increase in provisioning in 4Q-11
The position of each particular institution needs to be considered
BE transparency requirements have obliged institutions to disclose risks and coverage to the construction and real estate sector
For the global assessment of the impact the asset protection schemes given to CCM, Cajasur and CAM need to be factored in
19
The new measures
Timeline if there is not an integration process during 2012
3rd of February of 2012: approval of RD-L
31st of March of 2012: presentation of a plan to comply with the measures
• BdE approval within 15 working days
Year-end 2012: compliance with the measures
In order to facilitate these processes the FROB can buy shares of the institutions. These shares must be sold through competitive procedures in, at a maximum, 3 years
20
The new measures Timeline if there is an integration process during 2012
3rd of February of 2012: approval of RD-L
31st of May of 2012: presentation of an integration plan
• Approval by the Ministry of Economy in one month
12 months after the approval of the integration plan: compliance with the measures. The integration must be operative since 1.1.2013 at the latest
Conditions for the integration: As a general rule, the resulting entity must have a balance sheet which is 20% higher than the largest institutions participating in the process Improvements in corporate governance Objectives on lending to households and SMEs Objectives on reducing exposure to construction and real estate developers IPS type agreements not contemplated
FROB can provide funds to facilitate the processes: The new RD-L opens the possibility for the FROB to instrument the funds through Cocos Convertible in shares in 5 years FROB capital from €9bn to €15bn, reducing its leverage
21
The new measures Other relevant measures included in the RDL are those related to the rules for loans and credits other than mortgages to be considered as collateral in Central Bank operations
This set of measures respond to accommodate the measures in order to increase collateral availability recognition announced by the ECB on 8 December 2011
The ECB measures, and particularly the 3 years LTRO has improved the liquidity situation of the banking sector reducing funding tensions
Looking ahead, at some point the huge amount of liquidity in the hands of banks will come back to the markets, but in any case the re-opening of wholesale markets requires:
Regaining confidence for Europe
National authorities and institutions solving potential weaknesses
Opening of interbank markets
22
Conclusions There were basically 4 uncertainties regarding the Spanish banking sector:
Uncertainties regarding the corporate model of savings banks have been resolved: from 45 savings banks to 15 commercial banks
Uncertainties regarding balance sheet cleaning-up have been resolved: €50bn of additional cleaning-up, meaning a coverage ratio for land related assets of 80%, that is, 87% decline in land prices
Uncertainties regarding funding have been alleviated and funding tensions reduced after the ECB 3 year LTRO
Uncertainties regarding the impact of the negative macro outlook in asset quality are present but contained, as a moderate increase in NPL could be expected
23
Background material
GDP projections and NPL evolution
Housing prices
Government net borrowing and Nation net borrowing
Exports
Foreign claims of the Spanish banking sector
24
Background material GDP projections and NPL evolution
-5
-4
-3
-2
-1
0
1
2
3
4
50
10
20
30
40
50
60
dic
-06
mar
-07
jun
-07
sep
-07
dic
-07
mar
-08
jun
-08
sep
-08
dic
-08
mar
-09
jun
-09
sep
-09
dic
-09
mar
-10
jun
-10
sep
-10
dic
-10
mar
-11
jun
-11
sep
-11
dic
-11
mar
-12
jun
-12
sep
-12
dic
-12
mar
-13
jun
-13
sep
-13
dic
-13
%€b
n
Year-on-year change in doubtful assets. Other than construction and real estate
Year-on-year change in doubtful assets. Construction and real estate sectors
Year-on-year rate of change in GDP
Year-on-year rate of change in GDP. 2012-average forecast
Year-on-year rate of change in GDP. 2013-average forecast
NEGATIVE RATE OF CHANGE OF GDP
2012E 2013E
25
Background material Housing prices (1/3)
-3,2
-10,2
-15,1
-22,4-25
-20
-15
-10
-5
0
2008 2009 2010 2011
Real housing prices acumulated adjustment since the peak (year 2007), %
PROVINCIAL BREAKDOWN OF HOUSE PRICES ADJUSTMENT
Source: Ministerio de Fomento and Banco de España.
-10,6
-15,8
-21,7
-23,7
-21,2
-10,4
-19,6
-18,6
-20,9
3,1
-17,5
-21,8
-7,5
-12,5
-13,7
-4,7
-15,7
-15,7
-28,0
-11,2
-24,4
-18,3
-10,4
-10,9
-12,0-18,1
-8,8
-24,8
-27,6
-23,9
-17,3
-7,2
-11,3
-13,2
-25,4
-17,2
-16,8
-17,5
-14,3
-23,3
-13,7
-5,5
-18,2
-8,9
-24,3
-21,0
-16,9
-17,8
-14,7
-26,1
-6,7
0,0
MAXIMUM FALL - PERCENTILE 25
PERCENTILE 25
PERCENTILE 75 - MINIMUM FALL
CHANGE IN NOMINAL TERMS FROM 2008 PEAK TO Q4-2011 (%). NATIONAL AVERAGE = -19%
0
200
400
600
800
1000
1200
04 05 06 07 08 09 10 11
TOTAL
NEW HOUSING
SECOND-HAND HOUSING
DEMAND. Before a notary(in last twelve months)
Thousands
26
Background material Housing prices (2/3)
80
100
120
140
160
180
200
220
240
260
280
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Ireland (a) Spain
USA (Case-Shiller) (a) UK (Nationwide)
France (a)
Index 1997=100
HOUSING PRICES (real terms)
(a) Data for 2011 refers to Q1-Q3 average.
2010
2011
65
70
75
80
85
90
95
100
105
110
115
120
0 1 2 3 4 5 6 7 8 9 10
Years subsequent to peak in real prices
1979 1991 2007
SPAIN. THE ADJUSTMENT OF HOUSING PRICES (In real terms)
COMPARISON BETWEEN THE CURRENT AND PREVIOUS CYCLES
Real p
rices:
peak y
ear
= 1
00
27
Background material Housing prices (3/3)
26
33
39
52
53
55
79
0% 20% 40% 60% 80% 100%
US
JP
UK
FR
IT
DE
SP
Real Estate Other non-financial assets Financial assets
Households asset split (% of total assets)Source: Oliver Wyman
0
5
10
15
20
25
30
35
Irela
nd
Neth
erla
nd
s
Unite
d K
ingd
om
Austra
lia
Fra
nce
Norw
ay
Denm
ark
Belg
ium
Sp
ain
Sw
ed
en
Italy
Fin
land
Germ
any
Percentage increase in house proces not attributable to fundamentals, IMF April 2008
28
Background material Government net borrowing and Nation net borrowing
-4,5
-11,2
-9,3
-8,1
-4,4
-3
-12
-10
-8
-6
-4
-2
0
2008 2009 2010 2011E 2012E 2013E
Government net borrowing as % of GDP
-9,2
-4,7-4 -3,7
-1,4
-12
-10
-8
-6
-4
-2
0
2008 2009 2010 2011E 2012E 2013E
National economy's net borrowing as % of GDP
0
29
Background material Exports
60
70
80
90
100
110
120
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 JAN-SEP
SPAIN FRANCE GERMANY ITALY
1998 = 100
EXPORT MARKET SHARES OF GOODS (REAL TERMS)
SOURCES: Eurostat and IMF.
30
Background material Foreign claims of the Spanish banking sector
0
2
4
6
8
10
Unite
d K
ingd
om
Unite
d S
tate
s
Bra
zil
Mexi
co
Port
ugal
Germ
any
Italy
Fra
nce
Pola
nd
Neth
erland
s
Turk
ey
Sw
itzerland
Chin
a
Irela
nd
Luxe
mb
ourg
Consolidated Foerign Claims of Spanish banks as % of consolidated total assets of the Spanish deposit institutions. September 2011
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