IMF urges Spanish banks to boost capital in order to be able to lend more

The IMF on Thursday urged Spanish banks to take advantage of the improved conditions in the stock market to issue shares to boost their capital in order to be able to lend more and help the recovery.

A “top priority is for supervisors to continue encouraging banks to build core capital in absolute levels — including by taking advantage of buoyant equity markets — to boost share issuance,” the IMF said in its final report on Spain’s compliance with the terms of its 41-billion-euro bailout of its banking system.

Bank share prices on average have risen over 40 percent since June of last year. During periods of crisis Spanish banks tend to boost provisions rather than capital, while in other European countries the opposite is the norm.

The report recommended that the cap on cash dividend payouts by banks of 25 percent of attributable earnings introduced by the Bank of Spain in 2013 should be extended through to this year. The IMF noted that limiting dividend payouts in 2013 did not have an adverse impact on the ability of banks to issue shares. The multilateral agency also urged the banking sector to pursue further measures to enhance efficiency in order to support earnings.

Banks’ earnings last year were underpinned by one-off factors such as asset disposals and tax credits. “The ability to generate income from core banking activities continued to decline in 2013,” the IMF noted, and predicted that profitability would remain “constrained” until the recovery gathers pace. “Falling loan volumes due to deleveraging and a growing stock of non-productive assets (non-performing loans and reposed assets) will also constrain future profit generation,” the report said.

The report noted that the banks have benefitted from government’s approval last year of a mechanism to convert deferred tax assets into capital. It called for the swift sale of problematic assets and recognition of losses by the banks to create more scope for fresh lending to sectors of the economy growing the most.

The report said the main challenge of the Sareb asset management corporation, or so-called bad bank, set up by the government to absorb the toxic real estate assets of the nationalized banks should be to boost earnings to meet interest payments on bonds it has issued. The IMF noted that the Sareb booked a loss last year as a result of ongoing falls in property prices.

The main problems facing Spain highlighted by the IMF include weak lending, which is putting a drag on the recovery, high unemployment and the low profitability of banks from their core banking activity.

To help address these issues the IMF recommended that the government push ahead with its reform agenda. “Reform priorities in the financial sector include measures to further enhance banks’ ability to lend and support the recovery,” the report said. “Major structural reform efforts in a variety of areas, including labor and fiscal policies, will need to continue to achieve sufficiently rapid growth to bring unemployment down,” it added.