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Fitch: ECJ Case to Sap Spanish Bank Profits, Capital Hit Limited
December 22, 2016 / 1:57 PM / 7 months ago

Fitch: ECJ Case to Sap Spanish Bank Profits, Capital Hit Limited

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(The following statement was released by the rating agency) BARCELONA/LONDON, December 22 (Fitch) A European Court of Justice ruling on mortgage interest-rate floors will put further pressure on Spanish banks' already weak profitability, but the impact on capital is likely to be fairly small, Fitch Ratings says. The ECJ ruled on Wednesday that compensation for borrowers with abusive interest-rate floor clauses embedded in their loan contracts should be retroactive to the origination date, rather than the May 2013 cut-off imposed by previous rulings by the Spanish courts. We believe claims will go back as far as 2009 when sharp cuts by the European Central Bank drove interest rates below the floor clauses in some contracts. Thus compensation claims could be significantly larger than originally anticipated. Most Spanish banks booked provisions (totalling around EUR2bn) in late 2015 against the expected losses arising from the compensation claims dating back to May 2013.The ECJ's ruling exposes the banking sector to a maximum additional cost of around EUR4.5bn, according to an estimate by consultancy firm AFI. However, the final cost could be lower because the decision on whether an interest-rate floor clause is abusive must be made by a Spanish court on a case-by-case basis. Some clauses may therefore be found not to be abusive and some potential claimants may not want to take legal action if their potential compensation is likely to be small. Although internal capital generation will be adversely affected we do not expect a material impact on banks' capitalisation. At end-June 2016 the average fully loaded CET1 for Spanish banks stood at 11.5% and we do not expect the impact from additional provisions related to the ruling to exceed 50bp for any Fitch-rated bank. Some banks removed all the floors from their loan books in 2015 but others still have some portfolios with floors that they have been actively renegotiating. The ECJ ruling could therefore accelerate the removal of the outstanding floor clauses. This would reduce future interest income for these banks, further reducing profitability on top of the burden of additional compensation. Spanish banks' profitability remains subdued, with a return on equity of about 7% in 1H16. Contact: Josu Fabo Director Financial Institutions +34 93 494 3464 Fitch Ratings Espana S.A.U Av. Diagonal, 601, 2nd Floor 08028 Barcelona Roger Turro Director Financial Institutions +34 93 323 8406 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. 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