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Santander, Cajas Penalized as Bondholders Avoid Spain

By Esteban Duarte and Ben Sills

Jan. 23 (Bloomberg) -- Banks in Spain are being penalized as fallout from the U.S. subprime market makes its way to the country that contributes most to Europe's economic growth.

Lack of demand forced at least five Spanish financial institutions, including Banco Santander SA and Ahorro Corporacion Financiera SV, to cancel mortgage-backed bond sales between August and November, and no bank in the country has done a deal since then, data compiled by Bloomberg show. The difference in yields between AAA rated mortgage-backed notes and benchmark interest rates has more than quadrupled since July, leaving Spain with the widest spread in Europe, UniCredit SpA says.

Losses from rising home foreclosures in the U.S. are making bondholders more wary as Moody's Investors Service forecasts a 15-fold surge in Spanish mortgage defaults this year. The country's interest rates have doubled since 2004, hurting the bulk of borrowers who have adjustable rates. Home prices are falling for the first time in a decade, and household debt is 130 percent of income, twice the ratio in 2000, Bank of Spain data show.

``The subprime crisis is raising concerns about overheated property markets, especially Spain,'' said Raphael Gallardo, a strategist at Axa Investment Managers in Paris who helps oversee 600 billion euros ($876 billion) of assets. ``The real estate bubble is bursting. A lot of investors in Spanish mortgage-backed bonds may be hurt.''

Investor Concern

Spanish home loans account for 30 percent of the euro area's $1.2 trillion of outstanding mortgage-backed bonds, and the country's banks are Europe's second-biggest issuers after the U.K., according to Milan-based UniCredit, Italy's biggest bank. Since July, banks have publicly sold 2.55 billion euros of mortgage-backed debt, a fraction of the more than 72 billion euros sold in the first half, UniCredit data show.

Lenders sell pools of mortgages to investors to transfer the risk of borrower defaults and reduce the amount of capital they're required to hold as a cushion against losses. About two- thirds of Spain's mortgage-backed debt is sold to international investors, according to the Bank of Spain.

``Investors are concerned that the Spanish housing market will collapse as the U.S. market is doing now,'' said Meyrick Chapman, a London-based rates strategist at UBS AG, Europe's biggest bank.

Sales Scrapped

Santander, Spain's biggest bank by market value, scrapped a 1 billion-euro sale of asset-backed bonds in September, while Ahorro Corporacion Financiera, the Madrid investment group owned by 43 Spanish savings banks and known as Cajas, canceled the sale of at least $2 billion of covered bonds. Banco Popular SA, the third-largest bank, had intended to sell about $2 billion, and Bankinter SA, No. 6, at least 500 million euros of debt. Caja Madrid, No. 2 among savings banks, delayed the sale of 400 million euros of collateralized loan obligations.

Santander declined 4.8 percent, or 57 cents, to 11.27 euros in Madrid, after touching the lowest in 1 1/2-years yesterday. Banco Popular stock fell 1 percent to 9.51 euros and Bankinter dropped 44 cents, or 4.4 percent, to 9.61 euros.

The price of mortgage-backed securities issued by Santander in April dropped to 97.4 percent of face value from about 100 at the end of June, data compiled by Bloomberg show.

Debt with a similar five-year average maturity sold by HBOS Plc, the U.K.'s largest mortgage provider, fell to 98.57 percent in the past six months, while securities issued by Utrecht, Netherlands-based SNS Bank NV decreased to 98.38 percent. Notes sold by UniCredit fell to 97.87.

AAA rated mortgage-backed debt in Spain yields 0.90 percentage point more, on average, than the euro interbank offered rate, or Euribor, up from 0.20 percentage point more in July, UniCredit data show. The difference in the U.K. is 0.80 percentage point, and in the Netherlands, 0.60 percentage point.

Property Boom

Homeowners and developers owe Spanish banks 1 trillion euros in mortgages, more than three times their obligations in 2001, according to the Bank of Spain. The 443 billion euros of commercial mortgages to property and construction firms makes up about half of all corporate loans in the country.

Spain enjoyed the fastest-growing real estate market in Europe as retirees and foreign buyers snapped up 20 percent of the country's houses over the past decade, according to Vacation Homes Agency, a Madrid-based property industry trade group. The average price of a home in Spain has more than doubled since 2000 to 290,500 euros, data compiled by Sociedad de Tasacion SA, a Madrid-based property valuation company, show.

Price Fall

Deutsche Bank AG estimates Spanish house prices may fall as much as 8 percent this year as the highest European Central Bank interest rates in more than six years curb consumer spending.

Though loans aren't designated prime or subprime, about 95 percent of the country's mortgages have floating rates, according to Frankfurt-based investment bank Dresdner Kleinwort. Spanish developers and homeowners may be delinquent on 5.5 percent of total property loans by the end of 2008, up from 0.37 percent now, according to New York-based Moody's.

Spain is ``more vulnerable than other economies, due to its rapid lending development and the large amount of loans bearing variable interest rates,'' said Jean David Cirotteau, a Paris- based analyst at Societe Generale SA.

Bank Reserves

One reason Spanish banks may be able to weather a property market slump is the country's conservative reserving requirements, according to New York-based Morgan Stanley, the second-largest U.S. securities firm.

Banks on average have set aside reserves that account for 250 percent of their delinquent loans, compared with 63 percent for the rest of Europe. The country's central bank set rules in December 1999 that help banks cushion against loan losses when economic growth slows.

``With the current provisions, Spanish banks can face an increase in defaults of at least three times'' the current default rate on their loans, said Eva Hernandez, a bank analyst for Morgan Stanley in London. ``In most cases, the non-performing loans account for less than one percentage point of total credit awarded to clients.''

Since November, none of Spain's banks have raised money from unsecured bonds in the fixed-income market either, according to Bloomberg data.

As a short-term fix, they almost tripled borrowings from the European Central Bank to a record 52.3 billion euros between July and December, the biggest increase of any of the 15 member countries. They're now the second-largest users of ECB credit lines after German banks, accounting for 14 percent of borrowing, up from 4 percent in July.

``This is an unsuitable situation for banks, because they are financing long-term obligations on a short-term basis,'' said Luis Sanchez-Guerra, a director at Ahorro y Titulizacion in Madrid, Europe's largest issuer of home-loan bonds that are guaranteed by the lender. ``It's similar to a family that needs to finance their mortgage every week, instead of getting a 15- year loan.''

`Easy Credit'

A rapid cooling of Spain's housing market will reverberate through Europe because the country has contributed more than a third of new jobs in the region and accounted for almost a quarter of consumer demand over the past two years, according to Lombard Street Research Ltd. in London. That's more than Germany, where the economy is three times as large.

``This country has been living off easy credit since 2001,'' said Gonzalo Bernardos, professor of economics at Barcelona University. ``Everything became so cheap that people started to speculate. This is going to get worse.''

To contact the reporter on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net Ben Sills in Madrid at bsills@bloomberg.net

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