Thought: Rating agencies are working to help markets finding more downside, as Downgrade only comes when markets are in gloomy outlook. They just add up the reason to sell off. Why they can't act when markets were sailing higher a few weeks ago?
Nine firms were cut three notches and seven were kept on review for further reductions, Moody’s said yesterday in a statement. Santander’s U.K.-based subsidiary also was cut.
The moves followed Moody’s May 14 downgrade of 26 Italian banks and its Feb. 13 cut of Spain’s sovereign debt. The main drivers for the Spanish bank downgrades were a surge in soured loans, the recession, restricted funding access and the reduced ability of the government to support lenders as its own creditworthiness diminishes, Moody’s said.
“Banks will continue to face highly adverse operating and market funding conditions that pose a threat to their creditworthiness,” the ratings firm said. “The Spanish economy has fallen back into recession in first-quarter 2012, and Moody’s does not expect conditions to improve” this year.
Santander and BBVA (BBVA) both were cut to A3, the same as the Spanish government, from Aa3, according to Moody’s. Spokesmen for both banks didn’t return phone messages seeking comment on the downgrades.
Real Estate Collapse
Doubts about the health of Spain’s banking system have helped drive up the country’s borrowing costs on concern it will struggle to cover losses caused by a real estate collapse that threatens to force some lenders to seek state aid. The yield on 10-year Spanish government debt climbed 2 basis points to 6.31 percent yesterday as the spread over German bunds widened to 490 basis points from 482 basis points.
A four-year property slump has driven up loan defaults and heightened investor suspicions that firms’ balance sheets don’t fully reflect the scale of potential losses. The nation’s lenders carry 184 billion euros ($234 billion) of what the Bank of Spain terms “problematic” real estate-linked assets and the ratio of bad loans to total lending surged to 8.16 percent in February compared with less than 1 percent in 2007.
“If you look at the reported numbers so far, you don’t see that much deterioration on residential mortgages or on non- commercial real estate corporates and SMEs,” said Johannes Wassenberg, a managing director at Moody’s covering European banks. “If you look at the renewed recession you have in Spain and the very high unemployment rate, in our view that’s likely to have a knock-on impact on these broader asset classes.”
Swaps Rise
Credit-default swaps insuring Santander’s debt against default rose 10 basis points to 446.4 basis points on May 17 before the downgrade, according to data provider CMA. The swaps have risen 89 basis points this year, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Santander’s 1 billion euro of 4 percent notes due 2017 were yielding 5.342 percent as of 9:18 a.m. in Singapore, up from 4.171 percent in March when they were sold, BNP Paribas SA prices show.
The government, in its latest attempt to bolster confidence in banks, said on May 11 it would require lenders to set aside about 30 billion euros to cover potential losses on real estate loans that are still performing.
That’s on top of 53.8 billion euros of charges and capital ordered in February. Economy Minister Luis de Guindos also said the government would hire two auditors to value lenders’ assets.
The ratings under review are “by and large” related to mergers, Wassenberg said.
‘Clarity’ on Mergers
“We need to see further clarity on each individual case, how the mergers are proceeding, how they’re concluded, what kind of support, if any, they will be incorporating,” he said.
The government on May 9 took over the Bankia (BKIA) group, the lender with the biggest Spanish asset base after it filed 2011 earnings without certification from auditors. Deputy Economy Minister Fernando Jimenez Latorre yesterday denied deposits were leaking from Bankia after El Mundo newspaper reported that 1 billion euros had been withdrawn by customers since May 9. Bankia’s newly appointed chairman, Jose Ignacio Goirigolzarri, said yesterday that the bank’s activity had been “basically normal” in recent days.
Moody’s on Feb. 13 cut the debt ratings of Spain and five other countries including Italy and Portugal, citing Europe’s debt crisis. On April 30, Standard & Poor’s cut its credit ratings for 11 Spanish banks, including Santander and BBVA.
Swaps insuring BBVA’s debt against default reached 491.285 basis points on May 17, the highest in at least eight years, CMA prices show. The bank’s 2 billion euro of 3 percent notes due 2013 were yielding 3.735 percent as of 9:15 a.m. in Singapore, the most since the securities were sold on February 7, BNP Paribas prices show.
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