Today, the assessment of the capital needs of the Spanish banking system is presented based on the stress tests carried out in the framework of the sector's recapitalization and restructuring process, as provided for in the Memorandum of Understanding approved on July 20, 2012 between the Spanish and European authorities.

The fourteen main Spanish banking groups (considered the integration processes currently underway) have participated in this test, representing around 90% of the assets of the Spanish banking system.

The results confirm that the Spanish banking sector is largely solvent and viable, even in an extremely adverse and highly improbable macroeconomic context:

  • Seven banking groups, which represent more than 62% of the analyzed loan portfolio of the Spanish banking system, have no additional capital needs.
  • For the other groups, additional capital needs have been identified, over those existing as of December 31, 2011, which amount to 59.3 billion euros when the integration processes underway or deferred tax assets are not taken into account. This amount drops to 53,745 million when considering the ongoing merger processes and tax effects.

The identified capital needs are the result of a very broad and detailed analysis of the value of loan portfolios and foreclosed assets, as well as the ability of entities to absorb losses in the next three years in a very adverse scenario. It is important to highlight that the capital needs identified in the year do not represent the final figure for public aid to banks. This aid could be significantly lower, since it will be determined once the measures provided for in the recapitalization plans to be submitted by the entities to the Bank of Spain in October are taken into account.

Independent experts (consultants, auditors and real estate appraisers) have participated in the analysis, as well as the Bank of Spain and the Ministry of Economy and Competitiveness. In the course of the year, 36 million loans and eight million guarantees have been analyzed through appropriate sampling, using the databases available both from the entities included in the process and from the Bank of Spain. Six real estate appraisers – three national and three international – have carried out 1.7 million automatic appraisals of homes and more than 8,000 unique assets. The quality of the data used in this exercise has been verified by more than 400 auditors from the four leading firms in the sector in Spain, analyzing more than 115,000 operations. The process has also benefited from the supervision of the European Commission, the European Central Bank, the European Banking Authority and the International Monetary Fund.

The estimated figures for capital needs after the tax effect are shown in the following table: (See table in the press release in pdf format)

The exercise has determined the capital that each banking entity or group would require to reach minimum levels established as a reference in a base macroeconomic scenario –considered probable- and an extremely adverse one –considered very improbable-, defined for the period 2012-2014.

The analysis carried out has included an exhaustive review of the valuation and accounting treatment of the assets of Spanish banks, carried out by four audit firms and six valuation companies, as contemplated in the Memorandum of Understanding (MoU) agreed by the Spanish and European authorities on July 20, in the context of the assistance program for the recapitalization and restructuring of the Spanish banking system.

The MoU establishes that the estimation of capital needs, which are published today, constitutes an essential element of the plans established for the recapitalization and restructuring of the Spanish banking system. The steps to be completed from now are:

  1. Formulation of recapitalization plans for banks with a deficit on the minimum capital established in the stress test.
  2. Review of the same by the authorities and classification of the entities, following the MoU nomenclature, in groups 2 (entities that will require public support) and 3 (entities that will have until June 30, 2013 to execute their plan recapitalization and cover your capital needs). Group 2 entities must also submit a restructuring / resolution plan that must be evaluated by the Bank of Spain and sent to the European Commission for approval.
  3. Transfer of problematic assets of entities that require public aid to the Management Company for Assets from Bank Restructuring (SGA) provided for this purpose in the recent Royal Decree-Law 24/2012, of August 31.
  4. Capital raising by the entities that require it.

The estimated capital needs included in the Oliver Wyman report for various entities will not generally coincide with the volume of public aid required for their recapitalization. The possible difference between the capital need evaluated in the stress test and the finally necessary public aid will be given by the actions that the entities will incorporate in their recapitalization plans, and which can be summarized in the following categories:

  • Disposal of assets.
  • Capital raising that could be obtained privately in the markets.
  • Assumption of losses by the holders of hybrid or subordinate instruments under Royal Decree Law 24/2012.
  • Transfer of assets to the SGA.

The exercise has focused on the fourteen banking groups that were considered in the sector stress test (exercise top-down), the results of which were communicated on June 21. This relationship includes mergers announced at the time of testing.

The results of the Base scenario, with a capital ratio requirement of 9% for entities and a cumulative drop in real GDP of -1.7% until 2014, are:

  • 9 of the 14 banking groups would have enough capital to face the baseline scenario (they represent 75.6% in terms of total sample assets). Therefore, in line with the analysis of the International Monetary Fund and the stress tests top-down, both published last June, it is confirmed that the banking system generally has high solvency levels that allow it to face, without additional capital, the probable evolution of macroeconomic conditions.
  • The aggregate capital need in the baseline scenario would be slightly less than 25.9 billion euros and is mainly concentrated in the entities in which the FROB has a majority stake.

The results of the adverse scenario, with a capital ratio requirement of 6%, which contemplates a cumulative drop in GDP of -6.5% until 2014 and whose probability of occurrence is estimated to be less than 1%, are:

  • The greatest capital deficiencies (around 86%) are focused on those banking groups in which the FROB is the majority owned: BFA-Bankia, Catalunya Banc, NCG Banco and Banco de Valencia. These four entities have already started working, together with the national and European authorities, on the corresponding restructuring plans.
  • Three other banking groups would need additional capital in the adverse scenario contemplated. These are: Banco Popular, BMN and the planned merger between Ibercaja, Liberbank and Caja 3. These entities will present their recapitalization plans in October 2012 for approval by the Bank of Spain and by the European Commission. Based on these, the need for public aid and the amount thereof will be determined, where appropriate.
  • Seven of the groups considered, representing 62% in terms of the sector's analyzed loan portfolio, exceed the minimum capital required: Santander, BBVA, CaixaBank, Kutxabank, Banco Sabadell, Bankinter and Unicaja-CEISS. These entities will therefore not require additional capital even in a very unfavorable macroeconomic scenario.

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