The impact on earnings of the banks reduced by about 670 million
The Spanish banking sector has to deal with a new challenge at a time when it is still absorbing the blow from Latin America, although in his case, it has been aimed almost exclusively to industry giant, Santander.
The European Commission earlier this week published a report requesting that the banks annul the floor clauses affecting mortgages granted since its inception in 2010. It is going a step beyond the judgment delivered by the Supreme Court in 2013 when it ordered BBVA to terminate the additional cost of mortgages affected by the clause as from May 2013.
Market sources agree that this does not merely pose a “ systemic risk “ for the sector, but rather represents a spanner in the works for Spanish banks that have had to grapple with the increase in capital of Santander ( valued at 7,500 million euros) in January ; interest rates were forced down , as recognised by the French asset management company DNCA ; as a result of the mistrust that still exists regarding the recovery of the Spanish economy and , ultimately , trading with the markets which clearly exposes the crisis in Latin America.
670 million less
Other brokerage houses have estimated the impact will be 670 million euros on the net income of banks in the next two years and on account of this would prevent interest accruing. Looking towards 2016, if the Supreme Court extends the sentence to other affected entities (namely Liberbank, Banco Popular, Banco Sabadell and CaixaBank), the impact on their accounts will amount to 325 million euros and the following year, the figure will be slightly higher, up to 344 million for all four banks.
“Santander and Bankinter have never included floor clauses on their mortgages, while in the case of BBVA, Cajamar and Novacaixagalicia, these were removed following the judgment of 2013”, clarified by Berenberg, which is chaired by Francisco González that the banks should make returns for the previous three years (thus affecting the bank’s capital ratio), a period JP Morgan experts call “loophole”.
Liberbank -the only bank that is not present in the Ibex – 35 is the most affected since, by taking this action would eat up 19.5 % of its estimated net profit in 2016 (where the market consensus expects it to reach 166 million euros) despite having one of the lowest figures of mortgages granted on this account, amounting to a total of 2,900 million euros.
Alongside are Popular and Sabadell as the only banks that maintain this measure in force, after CaixaBank decided to give it up this month. Market sources suggest that they are likely to be the most effected in the future.
JP Morgan reduced by 9% of its earnings per share estimates for midsize banks in 2016 and 2017. According to the analyst firm, Popular will take the biggest hit, based on 15.500 million euros in mortgages granted under this clause linked the price of Euribor (variable rate for mortgages) , since it will cut 15 to 13 % its profit the next two years , representing an impact of 186 million over the two years, for a profit estimated 597 and 774 million in two years.
Moreover, analysts place the floor clauses as the main risk for both Popular and Sabadell, whose profits 11.3% in 2016 (98.7 million less) and another 9.6 in 2017 will suffer (which means subtracting an estimated 100.9 million profit of 1,051 million)
In the case of Bankia, the fourth in line, Mirabaud experts talk about “little impact” because it has the lowest number of mortgages linked to the floor clause: a total of 2,700 million. Their profit will suffer between 2.3 and 2.4% over the next two years, on dividends that will be above 1,100 million euros.
“This issue is a clear threat to domestic banks, although the impact on their accounts is more favorable than expected, we believe that this could lead to a stock market rally”, says JP Morgan. BBVA listed the only positive in the year, with gains of 3%.
Euribor in historical low affects its credibility
When floor clauses emerged in 2010, the interest rate applied-for term mortgages generally in Europe, the Euribor, was above 1.2%, but came from a much higher rate (touched highs in 2008, up to 5.4%) and was the perfect excuse for banks to implement this measure taking advantage of the need of the mortgaged to take measures against future rises.
However, time has shown a very different reality following the bubble bursting and the Euribor at 1% in August 2012, after starting to record lowest current score at 0.137%, while the affected have agreed to pay rates ranging between 2 and 2.75% on average. In any case, this is also beneficial to banks, says JP Morgan, because “the impact on their accounts of the reimbursements of 2013 and 2014 will be much lower, before a Euribor trading at higher levels.“