Spain's Cajas May Take Biggest Hit From Provisioning Changes

Spanish savings banks, already struggling with a deep economic downturn, will be the hardest hit from tighter rules governing the way the country's banks set aside cash against bad loans, a banker and several analysts say.

The Bank of Spain on Wednesday outlined a proposal that includes a faster recognition of provisions for past due loans, and bigger provisions on real-estate assets banks acquire or foreclose on.

The rule change follows mounting concern that banks aren't recognizing the true scale of their losses from exposure to Spain's troubled real-estate sector.

A Spanish banker, who declined to be named, said the rule change would be hardest for the country's savings banks, known as cajas, and smaller banks.

Analysts welcomed the move, saying it may reduce uncertainties about the health of the Spanish banking sector and force the troubled savings banks to seek merger partners quickly.

A spokesman for the Spanish savings bank association CECA said it is studying the impact. Spain's AEB banking association, which represents listed banks, wasn't immediately available to comment.

"For the Bank of Spain and the banking sector it's an exercise of transparency with respect to the exposure to the real-estate sector, which is what international investors were asking for," said Banesto Bolsa analyst Ignacio Soto Palacios.

"We also believe that it adds to the pressure on the savings banks in the midst of a restructuring process, since they will be the most affected by these measures," he said.

The proposal comes just days after the Bank of Spain shocked financial markets by seizing ailing regional savings bank CajaSur, a relatively small lender based in Southern Spain. The intervention has since weighed on Spanish equities, bond prices and the euro.

Investors are worried about potential fallout from the sector which is reeling from the collapse of the housing market. The cajas control around half of Spain's banking business and many of them were more aggressive lenders to the real-estate sector than their listed rivals.

The listed banks were lower early Thursday. At 0903 GMT, Banco Bilbao Vizcaya Argentaria SA (BBVA) was down 0.5%, while Banco Santander SA (STD) shed 1.5%. The smaller banks were also lower. The weakness in the banking sector pulled the IBEX-35 down 0.3%.

The proposal calls for banks to set aside provisions covering the full amount of a souring loan within a year. Banks currently have between two and six years.

On foreclosures or when banks swap loans for real-estate assets, lenders will have to provision 10% of the acquisition value right away, another 10% after one year, and another 10% if they still hold the asset on their books for more than two years.

Banks' real-estate holdings are growing fast as they seize homes from owners who default on their mortgages, and as they agree asset-for-debt swaps with struggling homebuilders following the collapse of Spain's decade-long housing boom.

The rule changes did include at least one positive element for banks. The new provisioning rules incorporate the value of real-estate collateral, applying a haircut of between 20% for a home that is the primary residence of the debtor, to 50% of a loan for undeveloped land. Current rules don't make a distinction between collateralized and uncollateralized loans, meaning banks are obliged to make 100% provisions on a bad loan regardless of the value of the collateral.

-By Christopher Bjork, Dow Jones Newswires, +34 91 395 81 23, christopher.bjork@dowjones.com