presentación bde 220211e

8/7/2019 Presentacin BdE 220211e

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Spanish Banking Sector: Progress Report 22/02/2011

London, 22nd February 2011

Tokyo, xx February 2011

Hong Kong, xx February 2011

Singapore, xx February 2011

Jos Mara RoldnDirector General of Banking RegulationBanco de Espaa

Spanish Banking Sector: Progress Report 22/02/2011

London 22 nd February 2011

Tokyo 25 th February 2011

Hong Kong 28 th February 2011

Singapore 1 st March 2011

Jos Mara RoldnDirector General of Banking RegulationBanco de Espaa


2/54


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3

The Spanish economy in perspective

The Spanish economys sharp growth was accompanied by high levels ofinvestment, only partly residential investment

SOURCES: ECB, Eurostat and Citigroup

-1

0

1

2

3

4

5

6

00 01 02 03 04 05 06 07

Change in GDP, %

Germany

Spain

France

Italy

United Kingdom

0

5

10

15

20

25

30

35

00 01 02 03 04 05 06 07

Total investment/GDP, %

Germany

Spain

France

Italy

United Kingdom

0

5

10

15

20

25

30

00 01 02 03 04 05 06 07

Gross savings/GDP, %

Germany

Spain

France

Italy

United Kingdom

0

200

400

600

800

1000

1200

14001600

1800

Ireland

United Kingdom

Belgium

Portugal

France

Hungary

Greece

Spain

Germany

Italy

USA

Japan

External debt, 2009, %

Gross internationalliabilities/GDP

Gross externaldebt/GDP

0

5

10

15

20

25

30

Spain Germany France Italy U. Kingdom

Investment/GDP, average 2000-2007, %

Non-residentialinvestment/GDP

Residentialinvestment/GDP


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4


The growth process was accompanied by budgetary equilibrium and lower,

and declining, levels of public debt, unlike in other EU countries

SOURCE: Eurostat

deficit

surplus

-5

-4

-3

-2

-1

0

1

2

3

4

00 01 02 03 04 05 06 07

Budget deficit/GDP, %

Germany

Spain

France

Italy

United Kingdom

0

20

40

60

80

100

120

00 01 02 03 04 05 06 07

Public debt/GDP, %

Germany

Spain

France

Italy

United Kingdom


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5


But some imbalances were

also built up in the Spanisheconomy during itsexpansionary phase

Increasing indebtedness of

the private sector

Excessive increase of thehousing sector

Increasing current accountdeficit

SOURCE: ECB, Federal Reserve and Office of National Statistics

40

90

140

190

240

1997 1999 2001 2002 2004 2006 2007 2009

Debt of the non-financial private sector as a percentageof GDP

Spain

Euro area

United Kingdom

USA

0

1

2

3

4

56

7

8

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Investment in housing as a percentage of real GDP

-12

-10

-8

-6

-4

-2

0

1995 1998 2001 2004 2007 2010

Current account deficit as a percentage of GDP


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6


Currently, the Spanish economy isposting still-weak but positive

quarter-on-quarter rates of change inGDP

while IMF and market consensusGDP growth projections are at similarlevels for the Spanish economy as for other euro area countries from 2012

SOURCES: INE, Eurostat, IMF and market data

-6

-4

-2

0

2

4

2008

2009

2010

2011

2012

2013

2014

2015

Year-on-year change in GDP. IMF forecasts, %

Germany

Spain

France

Italy

Euro Area

-6

-4

-2

0

24

2008

2009

2010

2011

2012

2013

2014

2015

Year-on-year change in GDP. Consensus forecasts, %

Germany

Spain

France

Italy

Euro Area

-3.0-2.5-2.0-1.5-1.0-0.5

0.00.51.01.5

Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10

Quarter-on-quarter GDP rate, %

Euro area

Spain


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7


The current weakness of GDP is due to the ongoing adjustment of thepreviously mentioned imbalances

Much of the adjustment is being made via job destruction , which denotes aproblem of the Spanish labour market

SOURCES: INE and Eurostat

-6

-4

-20

2

46

8

1012

14

16

92 94 96 98 00 02 04 06 08 10

Year-on-year GDP change, %

Euro area

Spain

Interest rates inSpain

0

5

10

15

20

25

30

-10

0

10

20

30

40

50

60

92 94 96 98 00 02 04 06 08 10

Unemployment rate and year-on-year change inpopulation, %

Rate of change intotal population

Rate of change inforeign population

Unemployment rate(right-hand scale)


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8


The budget deficit has worsened

markedly

Nonetheless, and thanks to a goodstarting position, and to the fiscalconsolidation plan approved by thegovernment, IMF projections placeSpains debt/GDP ratio below thatof other developed countries

SOURCE: IMF(a) The Spanish Government has established an unconditional objective regarding the fiscaldeficit for years 2012 and 2013. In 2012 the objective of fiscal deficit over GDP is -4.4%, andin 2013, -3%.

2012 proyections, as a proportion of GDP

DeficitCyclically-adjusted

deficit Public debtUSA -7.2 -5.4 102Euro area -4.0 -3.1 88.7

France -4.9 -3.8 89.4Germany -2.3 -2.2 77.1Italy -3.5 -2.3 120.1Spain -6.0 -5 72.6

Japan -8.0 -7 232.8U. Kingdom -6.1 -4.5 84.5Canada -3.3 -2.5 84.8

-12

-10

-8

-6

-4

-2

0

2

4

00 01 02 03 04 05 06 07 08 09 10E

Spain's budget deficit as a proportion of GDP, %

(a)


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9


The markets have tended to correct, in part, the overreaction seen in the

public debt spread in the context of the sovereign debt crisis in the euroarea

SOURCE: Datastream

0

50

100

150

200

250

300

350

400

Sep-09 Jan-10 May-10 Sep-10 Jan-11

5-year senior debt CDS, bp. Data to 7 February 2011

Emerging Africa, country1

Emerging Africa, country2

Emerging America, country1

Emerging America, country2

Emerging Asia, country1

Emerging Asia, country2

Spain


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Some of the imbalances are also centred on the real estate sector

House prices rose more in other countries than in Spain (50pp more in Ireland and 20pp more inthe UK)

The falls from the peaks reached are also proving greater in these other countries (19pp more inIreland and 2pp more in the UK)

Thus, comparatively, the degree of the adjustment in Spain is being harder than in other countries

0

10

20

30

40

50

60

Ireland - Spain Ireland - Spain U. Kingdom - Spain U. Kingdom - Spain

Difference in housing prices growth from 1997 until the peak (pp)Difference in housing prices adjustment from the peak until last available data (pp)

Note: differences are calculated as the difference between the growth rate of the corresponding country vis--vis Spain in both the growth phase and the adjustment phase

GrowthAdjustment

Adjustment

Growth


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11


The growth of house prices in Spainevidenced a lower overvaluationcomponent than that in othercountries (IMF, April 2008)

It was, therefore, largely based onfundamentals, and this is reflected ina lesser need for downwardcorrections in the current phase

Demographic and socioeconomicfactors

Spanish euro area membership, witha permanent real interest ratereduction effect, implying a permanentincrease in asset valuations

-6.1

1.7

11.8

16.2

17.0

17.0

18.1

20.6

21.8

28.0

29.2

32.1

-10 0 10 20 30 40

Austria

Germany

Italy

Sweden

Spain

Belgium

Denmark

Norway

France

U. Kingdom

Netherlands

Ireland

Percentage increase in house prices notattributable to fundamentals, %

SOURCE: IMF, April 2008


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Provincial breakdown of the growth in house prices

12


There has been an 18%adjustment in real terms (13% in nominal terms) inhouse prices in Spain fromtheir peak to 2010 Q4

This adjustment reflects theaverage figure, consistent with

sharper adjustments in differentregions and market segments

This adjustment in prices isconsistent with a volume ofnew house transactions

that has stabilised ataround 225,000 units


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13


The price adjustment isfollowing a similar pattern tothat observed in previouscycles

Affordability indicators for

households are once again athistorically low levels

60

70

80

90

100

110

120

0 1 2 3 4 5 6 7 8 9 10

Years following the peak in house prices

Housing prices in real terms. Comparison of current andprevious price cycles. 100=price observed in the peak of each cycle 1979

1991

2007.Actual

2007.Centralscenario

(July 2010)

20

25

30

35

40

45

50

55

60

1995 1997 1999 2001 2003 2005 2007 2009 2011

Affordability indicator, % gross disposable income

Worsening conditions

Improving conditions


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14

The Spanish banking sector in perspective

The weight of the banking sector is similar

to that of other EU countries In Spain, the sector basically comprises

commercial banks and savings banks

Spanish banks pursue a traditional retail banking model

There is no originate-to-distribute model

No investment in/generation of toxic assets (CDOs, CDOs^2, )

No conduits or SIVs were set up, since their consolidation would have been required

Prudent approach to wholesale funding; issuance towards the longest-dated termsavailable

Franchise value

SOURCE: ECB

0

100

200

300

400

500

600

700

800

900

I re land U. Kingdom France Spa in Germany I ta ly

Total banking sector assets/GDP, %, Dec.2009


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This is reflected in the sectors good starting position before theinternational financial crisis in the summer of 2007

SOURCE: IMF (October 2010)

15


0

0.2

0.4

0.6

0.8

1

1.2

ES IR IT FR UK DE

ROA, 2007 (%)

0

2

4

68

10

12

14

DE UK IR ES IT FR

Solvency ratio, 2007 (%)

0

2

4

6

8

10

IT ES UK IR DE FR

Capital/assets, 2007 (%)

0

50

100

150

200

250

ES FR UK DE IT IR

NPL coverage, 2007 (%)UK data referes to 2006


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The sectors good starting position was also evident regarding institutions

funding policiesSolid retail deposit base

Issuance in the wholesale markets towards the longest-dated term, making for a maturity structure where maturities are mostly concentrated after 2014

16


SOURCES: BdE and ECB

0

1020

30

40

50

60

1H2011

2H2011

1H2012

2H2012

2013

2014

Maturity structure of debt issued on markets, including short-term paper. January 2011, %

0

10

20

30

40

50

ES DE IT IR FR

Customer deposits (except credit institutions) / T. assets, 2007,%


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17


The Spanish banking sector built up

weaknesses during the economys

upturn

Sharp growth in credit, chiefly

in the construction and real

estate developers sector

Excess capacity

These imbalances have been more acute for a number of savings banks

Expansion outside their traditional geographical area

Singular stakeholder model that complicated their capacity of issuing equity

SOURCES: Eurostat and National Central Banks

0

10

20

30

40

50

6070

Ireland France Spain Italy Germany U. Kingdom

Credit to construction and real estatedevelopers/GDP. Dec-09, %

f h d d d


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Impact of the crisis and measures adopted

The impact of the international financial crisis on the Spanish banking sector,and therefore the measures adopted, can be characterised in different periods

The first , characterised by the outbreak of the international financial crisis andresilience of Spanish banks in the face of this first wave. Afterwards, the persistenceof the crisis and the crisis in the real economy translates into the adoption ofpreventive measures regarding the Spanish the banking sector

The second , characterised by the sovereign debt crisis in the eurozone in the firsthalf of year 2010, which led to the publication of stress tests, the tightening ofprovisioning requirements and amendment of the savings banks law

And a third stage , since summer 2010, characterised by a fresh spike in the

sovereign debt crisis which in Spain leads to much higher transparency requirementsand finally to the measures adopted under the recently approved Royal Decree-Law

Over this period, Spanish banks have already recognised assetimpairments for an amount equivalent to a nearly 9% of GDP

I t f th i i d d t d


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19

Impact of the crisis and measures adoptedFirst period

Summer 2007 December 2009 December 2010

LehmanBrothers

Resilience

Start of economic crisis

Sovereign debtcrisis: Greece

Sovereign debtcrisis: Ireland

Economicdownturn

Granting of guarantees for banksissuances of new debt and the creation ofthe fund for the acquisition of high-quality assets

The Eurosystem approves to meet all thedemands for liquidity (full allotment)

Creation of Fund for the Orderly Restructuring of the Banking Sector(FROB), with capacity to obtain fundstotalling 99bn



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20

Impact of the crisis and measures adoptedSecond period

Sovereign debt crisis in the euroarea

Weakness of the economy

Doubts over the quality of realestate assets

Stress testing

Tightening of provisions

Reform of savings bankslegislation

Completion of savings banksmergers and concentrationprocess


LehmanBrothers



Economicdownturn



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July 2010 stress tests (1)

The stress tests in Spain were marked by the high degree of transparency and the severity of the parameters applied

There was capital available in Spain, via the FROB, for those banks that didnot pass the tests and that could not obtain private capital

There were some savings banks that did not pass the stress tests

This was a reflection of the severity of the tests, both regarding the parameters and

the degree of coverage, since virtually the entire banking sector was included



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The stress tests were very transparent

All listed banks and all savings banks weretested, entailing around 90% of the Spanishbanking sectors total assets

In addition to publishing bank-by-bank datausing the common Europe-wide formatdefined, highly detailed information waspublished for each institution taking part in theexercise

Portfolio composition

Provisioning and fiscal impact Dividends and fair value of merger processes

Breakdown of public aid received before thetests

Stressed benchmarkscenario

Adverse stressed scenario

million % assets million % assets

Credit assets

Financial institutions

Corporates

Property developers andforeclosuresSMEs

Mortgages

Other retail

Impact sovereign risk and others

GROSS IMPAIRMENT

PROVISIONSSpecificGeneral

NET OPERATING INCOME AND CAPITAL GAINS

TAX IMPACT

NET IMPAIRMENT

Stressed benchmarkscenario

Adverse stressed scenario

INITIAL SITUATION 2009 million % RWA 2009 million % RWA 2009

Tier 1 dic 2009

FINAL SITUATION 2011 million % RWA 2011 million % RWA 2011

Net impairment

Dividend, fair value of mergers and others

Tier 1 Dec 2011 without F ROB

Committed FROBTier 1 Dec 2011

Additional capital to reach Tier16%

Stressed benchmarkscenario Adverse stressed scenario

DGF Support

Committed FROBAdditional Capital to reach Tier1

6%TOTAL



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... and demanding in terms of the

parameters used:

Decline of 2.6% in GDP in the period

analysed, on top of a decline of 3.6% in 2009

Highly significant reductions in collateral

values

28% for finished houses,

50% for houses under development

62% for land

Price developments have been better in reality than those considered in the stress tests

Reduction in profits before provisions which, for savings banks, resulted in a net operatingincome before provisions that was 37% lower than the average over the past 20 years

In the US stress tests, the profit margin was 15% lower than the average margin for the past 20years

40

50

60

70

80

90

100

110

120

130

0 1 2 3 4 5 6 7 8 9 10Years following the peak in housing prices

Housing prices in real terms. Comparison of current andprevious price cycles. 100=price obse rved in the peak of eachcycle

1979

1991

2007. Actual

2007. Adversescenario (July 2010 )



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The severity of the parameters translates into potential high losses in theadverse stressed scenario

The assumptions considered in the adverse scenario resulted in high levels of lossescompared with those recorded in other past crises and with those obtained in the USstress tests



0

2

4

6

8

10

12

14

Korea(97-99)

Finland(90-93)

Sweden-Norway(90-93)

UK -present(07-09)

Spain st. testsavings banks

(potencial losses)

Spain st. test(potencial lossesnet of provisions

and net operatingincome)

Losses as a percetage of risk-weighted assets, %

0

2

4

6

8

10

12

14

US SCAP Spanish savings banks

Potencial losses/RWA, %

SOURCES: Bank of England, US SCAP and BdE



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Tightening of provisioning (1)

In Spain, provisioning rules are straightforward and transparent

The regulator sets minimum criteria , and their compliance is verified by the supervisor and by banks external auditors

In other countries, provisions are decided by the banks with the approval of the external auditors

For assets that are collateralised, significant haircuts are applied taking the lowerbetween the loan value and the appraisal value (market value)

It is not the ordinary practice to apply these haircuts; rather, market value is considered

In summer 2010, provisioning rules were tightened for two reasons , at a time

when banks were already assuming high provisions as loans went into arrears: To accelerate the coverage of non-performing loans

To give banks incentives to place foreclosed assets or assets received in payment of debt on themarket

I f h i i d d d


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Acceleration of coverage requirement : the portion of the loan not covered by the valueof the collateral must be 100% covered within one year

Realistic haircuts in collateral values

At the lower of the loan value and the appraised value:

Borrowers principal dwelling: 20%

Commercial and industrial premises and multi-purpose offices: 30%

Other finished houses (real estate developers): 40%

Developable land parcels and building plots (real estate developers): 50%

Incentives are established for banks to take foreclosed assets off the balance sheet Provisions of 10% are set at the time of foreclosure based on the lower of the loan value and the appraised value.These rise to 20% and 30% after remaining for 12 and 24 months on the asset side of the balance sheet



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Provisions and asset valuationDiscussion on asset valuation turns on two aspects: losses already incurred and

potential losses in a stressed scenario

The losses already incurred are covered by provisions

Neither on the basis of their volume (which accounts for nearly a 9% of GDP) nor of their calculation (transparent, regulated and prudent) can it be sustained that there is a shortfall in therecognition of losses incurred

In the case of potential losses under stressed scenarios, scenarios with a very lowprobability of occurrence are considered. In fact, the July 2010 stress testing scenarioshave not materialised

One of the key variables in these exercises is the assumption on loss given default (LGD), whichis affected by the LTV and by the assumptions of a fall in price of the underlying assets

Not to take into account the LTV means adopting the assumption, which is not sustained by theevidence available, that this LTV is 100%



I f h i i d d d


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28

Provisions and asset write-downs in savings banks real estate developers andconstruction portfolio:

For savings banks, in the case of their exposure to the real estate developers and constructionportfolio (217 bn), a 46% of this (100 bn) is classified as potentially problematic. This amountcomprises:

Standard loans under surveillance : 28 bn

Doubtful loans: 28 bn

Foreclosures: 44 bn

The specific provisioning set aside at present accounts for 31% of this potentially problematic exposure

If the general provisions are added, coverage would rise from 31% to 38%



Impact of the crisis and measures adopted Actualizar nombres


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29


Amendment of the Savings Bank Law

Allows savings banks to issue top-quality capital, facilitating their access to the capitalmarkets

Contributes to making their management andgoverning bodies more professional

Subjects savings banks to greater marketdiscipline

Culmination of the process designed inthe FROB Royal Decree

From 45 to 17 savings banks

Ibercaja IbercajaKutxa KutxaCaja Vital Caja VitalC aja O nt in ye nt C aja O nt in ye ntCaja Pol len a Caja Pol lena

45 Savings banks 17 Savings banks



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Impact of the crisis and measures adoptedThird period

In the summer the wholesale marketsreopened for Spanish banks,

but economic weakness persists andthe pressure on Irish debt generatescontagion effects. Potential access towholesale markets is once again madeharder

More transparency

Increase in capital requirements (8%-10%) with the backing of the FROB iffunds are not obtained in the market


LehmanBrothers



Economicdownturn



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Impact of the crisis and measures adoptedThe banking sector at end-2010

Recognition of problems by banks (1)

Since January 2008, the bankingsector has recognised andassumed asset impairment lossesfor an amount equivalent to nearly 9% of GDP

53 bn of net specific provisions that lowerprofit against the P&L accounts

Additional 16 bn using the generalprovision, in force since mid-2000

Additional 22 bn of specific provisionsagainst reserves for institutions undergoingrestructuring through the FROB

53

16

22

Already consolidated provisions since Jan-08. Depositinstitutions, bn

Specific provisions against reserves forinstitutions in restructuring processes

Reduction in gene ral provisions

Net specific provisions that lower profit

against the P&L accounts

39

52

Banks

Savings Banks

Already consolidated provisions since Jan-08, bn



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Spanish institutions have also reinforced their capital over the course of this period

The increase in the excess of Tier1 capital relative to the requirements accounts foraround 3.7% of GDP

Thus, adding of accumulated provisions and the excess of capital over the minimumalong this period represent nearly a 13% of GDP


Recognition of problems by banks (2)

7.6

9.5

Dec-07 Dec-10 E

Tier1 capital of Spanish deposit institutions, %



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These corrections in asset value are largely due to the loans related tothe real estate developers and construction sector, whose doubtful assetsratio is growing significantly more than in the rest of the portfolio


Credit portfolio, construction and real estate developers (1)

0

5

10

15

Mar-06 Mar-07 Mar-08 Mar-09 Mar-10

Doubtful loans ratio. Deposit institutions.Latest data: Sep-10, %

TOTAL DOUBTFUL LOANS RATIONON-FINANCIAL FIRMS, EXCEPT CONSTRUCTION AND REAL ESTATECONSTRUCTION AND REAL E STATE DEVELOPMENT HOUSEHOLDS. HOUSE PURCHASEHOUSEHOLDS, EXCEPT HOUSE PURCHASE



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However, this portfolio segment, where the problems are concentrated,accounts for 22% of savings banks credit to the resident private sector,including foreclosures

NOTE: The banks depicted account for close to 90% of deposit institutions totalassets

p pThe banking sector at end-2010

Credit portfolio, construction and real estate developers (2)

05

10152025303540

20 30 40 50 60 70 80% Non-performing loans ratio of

construccion and real estate sector

% loans to construction and real estate over total loans to firms

Dispersion of institutions by the weight of loans to construction

and real estate development and by the non-performing-loansratio of that sector. Sep-10

0

20

40

60

80

100

% over total loans,including

foreclosures

% over consolidatedassets

Banks

0

20

40

60

80

100

% over total loans,including

foreclosures

% over consolidatedassets

Savings banks

Construction and real estateincluding foreclusuresOther



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Despite the real estate marketadjustment in Spain, the retail mortgageportfolio does not pose a materialproblem

Its default rate is, and has historicallybeen, low

The portfolios average LTV is 62%,and is distributed uniformly acrossinstitutions

The mortgage business in Spain isstraightforward and banks haveadditional guarantees on the mortgagedasset


Retail mortgage portfolio

42,52

8,475,47

Dec-92

Dec-93

Dec-94

Dec-95

Dec-96

Dec-97

Dec-98

Dec-99

Dec-00

Dec-01

Dec-02

Dec-03

Dec-04

Dec-05

Dec-06

Dec-07

Dec-08

Dec-09

Doubtful a ssets ratio. Deposit institutions, %

Mortgages Credi t to the r es ident p rivate sec to r

0

10

20

30

40

50

60

7080

90

LTV


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36

P&L accounts will remain underdownward pressure in the comingquarters

The cost of funding remains high

Although it places downward pressure onspreads for new business, it passes throughslowly to average rates and, therefore, to net interest income

This is a parsimonious process that is only worrying if these trends hold in the medium

term


Profitability (1)

0

1

2

3

4

5

6

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Net interest income/ATA. Deposit institutions, business inSpain, %. Data to Sep-10

Net interest income

Financial revenue

Financial costs

0

1

2

3

4

5

6

7

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Weighted marg inal interest rates. Deposit institutions, %.Data to Dec-10

Assets

Liabilities

Spread

12-month Euribor



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37

In any event, banks core

business remains profitable lookingahead

Spanish banks are efficient, and the mergerand concentration processes via cost savings have a positive influence on this dimension

Institutions, and savings banks in particular,have a high franchise value and productcross-selling capability, underpinned by theirproximity to customers

Activity will become more dynamic as therecovery in the economy gathers pace (recallIMF forecasts)

NOTE: Institutions represented account for more than 94% of depositinstitutions total assets


Profitability (2)

-0,5

0

0,5

1

1,5

2

2,5

3

Each column represents an institution

ROA and ROA without provisions, Sep-10, %

ROA withoutprovisions

ROA



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38

As indicated, the sovereign debt

crisis in the euro area has resultedin the wholesale funding marketsclosing

Spanish banks have resorted toEurosystem funding to a greater extent

than in the past But after peaking in the months prior to

the publication of the July 2010 stresstests, the situation has tended tonormalise

The data for January reflect a further reduction in applications for Eurosystemlending

which confirms that when the opportunity arises, Spanish banks tap the wholesalemarkets for funding


Funding (1)

NOTE: Net lending is defined as the difference between the liquidity injectedand the funds deposited in the liquidity absorbing operations

0

5

10

15

20

25

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10

Gross lending from the Eurosystem, %,compared to Spain's capital key. Latest

data: Jan.2011

0

10

20

30

40

Jan-07 Oct-07 Jul-08 Apr-09 Jan-10 Oct-10

Net lending from the Eurosystem, %,compared to Spain's capital key. Latestdata: Jan.2011



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39

Notwithstanding the fact banks should continue to manage their businessappropriately, the structure of savings bank funding shows that stabledisposable funding stands at 100.1% in relation to stable funding needs


Funding (2)

Net Stable Funding. Sa vings banks' balance sheet, bn

Customer loans 870 Own funds 47

Investments 30Wholesale funding with maturity of morethan 1 year 273

Other net assets 5 between 1 year and 2 years 62between 2 and 5 years 109more than 5 years 102

Retail funding 590Stable funding needs 904 Stable funding sources 911

Liquid securities 117

Wholesale funding with maturity of less

than 1 year 129Balances at central banks 19Total 1040 Total 1040


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Savings banks

41

Third period: new measuresTransparency (2)

The information already published by Spanish savingsbanks is very detailed, inparticular concerning theirconstruction and real estatedevelopers portfolio

Note. Savings banks have published a total figure for exposure to this sector of 205 billion, aggregating the data submitted by each institution,instead of the 217 billion reflected in this table. The difference is due to divergent data presentation criteria. Thus, for example, in this table undrawnloans, such as financial guarantees and drawable credit, are included, and the amounts for foreclosures are given as the value of the loan at the timeprior to foreclosure.

Exposure% of

exposure% of totalcredit risk

Credit risk 173 80% 18%Standard 117 54% 12%

Finished housing 50 23% 5%Housing under construction 26 12% 3%Land 22 10% 2%Other 19 9% 2%

Standard under surveillance 28 13% 3%Finished housing 7 3% 1%Housing under construction 4 2% 0%Land 10 5% 1%Other 7 3% 1%

Doubtful 28 13% 3%Finished housing 9 4% 1%Housing under construction 5 2% 1%Land 7 3% 1%Other 7 3% 1%

Foreclosures 44 20% 4%Finished housing 18 8% 2%Housing under construction andother 3 1% 0%Land 23 11% 2%

TOTAL EXPOSURE 217 100% 22%



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The figure for savings banks total exposure to the construction and real estatedevelopers sector (217 bn) is lower than the figure published at the time of theJuly 2010 stress tests (303 bn). The reasons are:

Changes in the portfolio between July and December (-10 bn)

The remainder is a result of the process of greater transparency set in place from thatdate by the Banco de Espaa and by institutions involving the use of stricter methods ofallocation to each portfolio, more closely in line with the actual exposure and the nature ofthe loan and the customer. From the stress test figure, then, the following should bediscounted:

27 bn allocated to civil engineering and public works

16 bn allocated to large corporations collateralized with real estate assets

33 bn allocated to SMEs collateralized with real estate assets



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To compare the figure of 217 bn for exposure to construction and real estate developers

with that published quarterly in the Banco de Espaa Statistical Bulletin (SB) (230 bn inSeptember 2010, the latest figure available), the following should be taken into account:

The SB does not include foreclosures (44 bn) nor financial guarantees and drawable credit (14 bn)

However, the SB does cover real estate developers and construction in a broad sense of the term,therefore including an amount of 66 bn corresponding to activities not strictly related to housing

construction

Finally, from September 2010 to December 2010, there was a change in the portfolio of the order of-5 bn

The information published by the Financial Stability Report (FSR) followsanalogous criteria to those of the SB

In fact, Box 2.3 of the March 2010 FSR indicated that the data published there on construction andreal estate developers was an upward biased estimate. In particular, the Box stated It has beendecided to treat both sectors jointly because the boundaries between the two, in terms of statisticalclassification, are occasionally blurred




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The latest FSR has published an amount of potential problem exposures for total depositinstitutions of 180.8 bn (June 2010)

These data represent 35.2% of the total exposure of Spanish deposit institutions to real estatedevelopers and construction as at June 2010

The level of coverage, including generic provisions, was 33%

The data published by the savings banks (December 2010) show:

Potential problem exposures of 100 bn

This level of potential problem exposures represents 46% of the total exposure to construction and realestate developers

Its level of coverage at December 2010, including general provisions, is 38%


Impact of the crisis and measures adoptedh d d


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45

Third period: new measures New Royal Decree-Law (1)

New capital requirements

Credit institutions are required to have acore capital ratio of at least 8%

This draws closer to the Basel III-2013 core

capital definition,

tightening most significantly the minimumrequirement

Such tightening is not subject to valuejudgment: it will depend on (1) starting

position and (2) minimum capital requirement

0%

2%

4%

6%

8%

10%

12%

New measuresSpain

Basel III-2013 Basel III-2019

Core capital requirements under thenew Spanish regulations compared withwhat Basel III-2013 will demand

Conservationbuffer

Core EquityCapital

Definition of core capital: new measures approved

+ Paid-up capital+ Reserves+ Share premium+ Positive results for the year (% foreseeabl e devoted to reserves)+

+ Minority interests+ Subordinated debt compulsory convertible into common shares (*)+ FROB support

- Own shares- Losses for the year- Goodwill- Other intangible assets-

-

(*)

Other net balances of other comprehensive income

Compulsory conversion into shares at the latest by 31st December2014; pre-fixed conversion equation; subject to is suer discretionregarding coupon payment when its solvency situation requires it;and admissible as own funds for accounting purposes

Unrealised gains on fixed income and equity in theavailable-for-sale financial assets portfolio

Unrealised losses on fixed income and equity in theavailable-for-sale financial assets portfolio

Impact of the crisis and measures adoptedThi d i d


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The requirement of a core capital ratio of 8% will be raised to 10% for thosecredit institutions meeting the following two conditions:

They have a wholesale funding ratio of over 20%

An amount equal to or greater than 20% of their share capital or voting equity has not been placed with third parties

For all purposes, the FROB acts as a backstop as from the approval of the RoyalDecree-Law

Banks that cannot raise capital on the market will resort to the FROB

To all intents and purposes this means that, further to the enactment of the Royal Decree, all Spanish banks will operate with a core equity capital ratio of at least 8%

Third period: new measuresNew Royal Decree-Law (2)



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Once institutions have reached the new minimum requirements (8%-10%)depending on each particular case, if their core capital falls below minimumrequirements at a maximum of 20%, then

there are certain restrictions in terms of profit distributions in the form of dividends,variable remunerations, retribution of preference shares or share buy-backs

in line with the idea of the conservation buffer in Basel III

but requiring a higher minimum requirement (at least 6.4%) with respect to Basel III-2013 (4.5% in this case)




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The new measures will have Spanish credit institutions operating with

very high core capital levels

The requirements of higher capital ratios imply an extra cushion for credit institutions: intimes of uncertainty this is the best way to reinforce market confidence

The requirement is based on core capital because, after the approval of Basel III, core

capital is clearly the new market and regulatory reference

A much higher core capital requirement (8%-10%) with respect to that approved bythe Basel Committee for year 2013 (3.5%) means Spanish institutions are operating wellabove this international minimum requirement

The franchise value of savings banks, which is particularly strong in their traditionalregions of origin, is retained

Savings banks become mere holders of a stake in the bank




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SavingsBank 1

SavingsBank 2

SavingsBank n

IPS(Bank)

IPS(Bank)

Capital

SavingsBank 1

Savings

Bank 2

SavingsBank n

SavingsBank 1

SavingsBank 2

SavingsBank n

Commercial Bank

Deepening and simplification of restructuring process



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How high are the new capital ratios?

The Royal Decree-Law does not set a new stress exercise, but raises the ratio withwhich institutions must operate: it is a purely arithmetical exercise

By way of illustration, the stress tests in the United States, in Europe and in Spainentailed reductions in starting capital ratios which, if applied directly to the core ratio

Spanish institutions have to maintain, would still leave Spanish banks with a comfortablecapital cushion


1.1 1.0 1.01.8

3.7

0

2

46

8

10

12

EuropeanST Tier1

USA STTier1

USA STCore

SpanishST Tier1

Spanishcajas ST

Tier1

Impact on capital ratios of the stress tests

Initial ratio

Final ratio (wi thout

after-ST public aids)

Difference

Impact of the crisis and measures adoptedThird period: new measures


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The recently approved Royal Decree-Law entails an increase in the corecapital ratio to 8%, and to 10% for those credit institutions that evidence

greater dependence on wholesale funding and which have not placed an amountequal to or greater than 20% of their share capital or voting equity with thirdparties

The core capital definition draws closer to the Basel III-2013 definition of core capital, butraising capital requirements above the figure stipulated under Basel III (which in 2013 is 3.5%)

Moreover, this bolstering of solvency comes after

Institutions have made provisions equivalent to nearly a 9% of GDP and have increased their capital

They have recapitalised under the savings bank merger and concentration processes that have applied tothe FROB, for an amount of 11.6 bn

Provisioning rules have been tightened , in particular concerning the valuation of collateral (applying severehaircuts) and those that have to be set aside in the case of foreclosures

Total transparency has been required of banks regarding their exposure to the real estate development and construction sector, reinforcing what was already done in the July 2010 stress tests



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Impact of the crisis and measures adoptedN t t


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Next steps

Having to apply to the FROB involves several consequences for banks

The FROB will acquire ordinary shares , or other convertible securities, in such banks

If a savings bank were in this situation, this would mean that it would have to transfer its activity to a bank

The FROB would sit on the governing body of the bank issuing shares. It is not an interventionof the institution, but to be sure that recapitalisation plans involving public funds are fulfil by institutions

The bank must submit a recapitalisation plan that has to be approved by the Banco de Espaa,

and it mustinclude a business plan

with efficiency, profitability, leverage and liquidity targets

Conclusions


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The results of the restructuring and write-downs made to date have been substantial

The new measures adopted are aimed atdispelling any remaining doubts about thesoundness of the Spanish banking sector,

whose future outlook, like that of theSpanish economy, cannot be derived in a linearfashion from the current situation

The Spanish economy, as the IMF projections show,has capacity to grow

And the core business of Spanish banks is profitablein the medium and long term

0.0

0.5

1.0

1.5

2.0

Dec-01 Dec-03 Dec-05 Dec-07 Dec-09

ROA, %. Last data: September 2010

ROA

ROA ex-provisions

-1-0.5

00.5

11.5

22.53

3.54

Germany

Spain

France

Italy

Euro Area

Year-on-year change in GDP. IMF forecasts, %

2010

2011

2012

2013

presentación bde 220211e

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