Tuesday, June 26, 2012

Moody's Downgrades 28 Spanish Banks on Commercial Real Estate Exposures, Sovereign Debt Downgrade

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After Moody's downgraded Spain's sovereign debt on June 13, today they downgraded 28 Spanish banks. But remember, Spanish banks could receive a 100 billion euro bailout loan from the European Financial Stability Facility/European Stability Mechanism on July 9 if euro zone finance ministers sign the agreement, which could then put senior bondholders at risk (FT). Watch out for more CRE losses. If interested, visit the Spanish Bank and Sovereign Debt Risk Monitor for links to Spanish government bond yields, bank CDS quotes, and the debt maturity schedule.

"Today's actions reflect, to various degrees across these banks, two main drivers:

(i) Moody's assessment of the reduced creditworthiness of the Spanish sovereign, which not only affects the government's ability to support the banks, but also weighs on banks' standalone credit profiles, and

(ii) Moody's expectation that the banks' exposures to commercial real estate (CRE) will likely cause higher losses, which might increase the likelihood that these banks will require external support."

More on Spanish bank CRE risk:

"SECOND DRIVER --- BANKS' CREDIT PROFILES VULNERABLE TO HIGHER LOSS ASSUMPTIONS, PARTICULARLY ON COMMERCIAL REAL ESTATE EXPOSURES

Several Spanish banks' balance-sheet clean-up exercises have illustrated the difficulties involved with establishing credible CRE asset valuations, because of the lack of market liquidity. Furthermore, the required extended period of fiscal consolidation, both at central and regional government levels, is likely to maintain negative pressure on banks' balance sheets. As such, Moody's stressed loss assumptions on the banks' CRE exposures as well as its other credit exposures now anticipate outcomes ranging from its more adverse scenario to more highly stressed scenarios typical of countries that have experienced severe market disruptions in their CRE sectors (e.g., Ireland). Many banks don't have sufficient shock absorbers (earnings and capital) to withstand such potential stresses. The downgrade of the banks' standalone credit assessments and their new levels mostly in sub-investment grade directly reflect the banks' relative vulnerability in such a stress scenario as well as the heightened likelihood that they may need further external support.

Nevertheless, Moody's views positively the Spanish government's efforts to stabilize the entire banking system as well as Bankia (Ba2, b2, all ratings under review with uncertain direction), which have culminated with the announcement made on 9 June to seek financial assistance from euro area Member States of up to EUR 100 billion to recapitalize Spanish banks. The support will be provided by the EFSF or ESM in the form of a loan granted to the FROB. This amount is intended to cover the capital needs that will be revealed by the two valuation processes currently underway plus an additional "safety margin". The Spanish government has not revealed yet the amount that will be finally requested and individual capital needs will be made public once the last phase of the valuation is completed."

Full press release of downgrade: http://www.moodys.com/research/Moodys-downgrades-Spanish-banks--PR_249316

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