In the context of a soft landing and despite significant exposures in lending to construction and commercial real estate, Spanish banks rated by Moody’s are well positioned to withstand a slowdown, says Moody’s Investors Service in a new Special Comment.
However, in the unlikely event of an abrupt correction of the real estate market, a small number of institutions combining a high exposure to the real estate sector with modest financials may see their ratings come under pressure.
“Under our base case of a soft landing and despite some significant exposures in lending to construction and commercial real estate, Spanish banks and savings banks rated by Moody’s are well positioned to withstand a slowdown in these sectors,” said Maria Cabanyes, a Moody’s Senior Vice President and co-author of the report.
“Our ratings already take into consideration the financial institutions’ high exposures to the real estate market (which range from maximums of 300% of Tier 1 capital for Aa-rated institutions to 700% for those rated in the mid to low single-A categories) and our expectation of an increase in their loan impairment.”
The Spanish economy has experienced strong growth over the past decade, with the real estate sector playing a key role on the back of specific socio- and macro-economic factors. As a result, Spanish financial institutions have seen a material increase in their exposure to real estate. In Moody’s opinion, the most likely scenario is for a “soft landing” in the overheated real estate market, underpinned by a standstill or moderate decline in prices, real GDP growth around 3%.
“In the unlikely event of an abrupt correction of the real estate market — a ‘hard landing scenario’ — that could be driven by economic growth materially deviating from 3%, we see certain institutions as being more at risk, such as those that combine a high exposure to the real estate sector with modest financials,” says Ms Cabanyes in the report entitled ‘Special Comment: Spanish Banks and Real Estate’. Moody’s did not made reference to specific issuers in this report since the implications for individual ratings will depend on the steps that will be taken to address the potential impairment of earnings and capital that could result from such a scenario.
Moody’s views Spanish banks and savings banks as overall more resilient today to a correction in the real estate market than they were in the crisis in the early 1990s. The rating agency’s stress-testing confirms that asset quality will need to deteriorate significantly before affecting their shock-absorption capacity. “In summary, although a structural transition towards a less heavy weighting to the construction and real estate sectors could have growth implications for Spanish financial institutions, the factors highlighted in this report make us confident that the system as a whole will prove resilient,” added Cabanyes.
