Bank of Spain seen set to take over three savings banks

 

The Bank of Spain is expected to announce on Friday that it will take over at least three unlisted savings banks which failed to attract private capital under a government programme aimed at restoring confidence in the country's banking system.

The central bank is expected to inject capital into two savings banks in the eastern region of Catalonia - Catalunya Caixa and Unnim - plus a third savings bank, NovaCaixaGalicia, in the northern region of Galicia in a widely-predicted move.

Spain's regional savings banks lie at the heart of concerns about the financial system in the euro zone's fourth biggest economy, where the government is fighting to bring down its public spending deficit.

These unlisted banks, whose number was greatly reduced by government-driven mergers last year, lent heavily to real estate developers during a housing boom and were used by regional politicians to fund pet projects.

The Bank of Spain has estimated the country's banking system has a capital shortfall of 17 billion euros and analysts believe capital levels may have to be boosted still further to provide for losses on toxic real estate assets.

"Spain may come under pressure to do a little bit more in terms of recapitalisation," said Neil Smith, banking analyst at West LB.

Friday is the deadline for savings banks to seek private capital to boost their financial resilience or face nationalisation.

Two lenders - Bankia and Banca Civica - managed to plug their funding gaps with initial public offerings in July, but others have failed to attract private investment.

The three banks likely to be nationalised together make up around 7% of Spain's banking system and will use up just under 5 billion euros of state funds, using Bank of Spain estimates of banks' capital shortfalls.

The amount of state money to be injected into savings banks will not exceed 7.7 billion euros, including the 2.8 billion euros already used to nationalise troubled savings bank Caja de Mediterraneo (CAM), the Bank of Spain has said.

A beefed-up Europe-wide bailout fund, awaiting approval by national parliaments in the 17 member currency bloc, could be used to inject capital into Spain's banking system.

Recapitalisation by the European Financial Stability Facility (EFSF) could attract more private investors into Spain's banking system, West LB's Smith said.

"The prospect of a potentially larger European Financial Stability Facility might improve sentiment towards European banks and make attracting private equity easier," he said.

Bank of Spain governor Miguel Angel Fernandez Ordonez is due to give a press conference on Friday at 1000 GMT.