SocGen Says Spanish Banks Are In Need Of €50 Billion If Their Worst Real Estate Nightmare Comes True

Spanish banks are in need of a serious capital injection if the real estate sector heads lower, according to Societe Generale's Patrick Lee and Carlo Tommaselli.

Right now, the Spanish government only projects a 23% impairment on real estate loans in its worst case stress test scenario. But SocGen's team has gone even further, to 30%, and raised the tier 1 capital requirement, from 6% to 10%.

Lee and Tommaselli's conclusions are worrying:

In aggregate, we conclude that a worse RE outlook would mean a capital need of just under €50bn -- which is somewhat lower than our earlier estimate of €69bn in our February note. There are two reasons for this -- firstly, the previous analysis was a "macro" analysis using just industry level data while this one is from the bottom up; secondly, our previous analysis used a hypothetical haircut of 45% and not 30% used here. If we apply the 45%, this bottom-up framework would imply an incremental capital need of €75bn, in line with our previous estimate.

In January, Spain supplied €20 billion to its banking sector. Nobody bought it then, and this is part of the reason why. And the potential for problems isn't just in Spain's cajas, or local savings banks, but also its bigger firms, like Santander, BBVA, and Banco Popular.

Note their capital shortfalls if Tier 1 capital requirements go to 10%.

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From Societe Generale:


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