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UPDATE 3-Toxic Spanish property hammers Sabadell's profit
July 25, 2012 / 9:33 AM / 5 years ago

UPDATE 3-Toxic Spanish property hammers Sabadell's profit

* Net profit down 45 pct to 90 mln euros vs 113 mln forecast

* Makes provisions of 1.89 billion euros in H1

* Bad loans 7.82 pct in June vs 6.02 pct in March

* Says did not increase Spanish debt holdings (Adds sovereign holdings, share price)

By Jesús Aguado and Sonya Dowsett

MADRID, July 25 (Reuters) - Sabadell’s first-half profit fell sharply on a big hit from potential losses on toxic property assets, a pattern likely to be repeated across the sector as Spanish banks clean up soured real estate deals.

The Spanish government has demanded banks beef up provisions as the country tries to contain the damage from a burst real estate bubble in 2008 and an ensuing recession.

Those problems have now been compounded by concerns over Spain’s indebted regions, causing the country’s borrowing costs to spiral and raising fears of a sovereign bailout.

Spain has already had to ask for up to 100 billion euros in European aid to shore up its most troubled banks.

Sabadell, Spain’s fifth-largest lender, said on Wednesday t it had put aside provisions of 1.89 billion euros ($2.28 billion), of which 1.3 billion euros are related to the new government requirements.

First-half profit fell 45 percent to 90 million euros from a year earlier, missing analysts’ forecasts of 113 million.

Sabadell stock closed up 3.29 percent at 1.38 euros, against a 0.82 percent gain in the blue-chip Ibex-35 index.

The real estate woes are likely to scar results across Spain’s banking sector, though heavyweight Santander, due to report on Thursday, decided in the first quarter to wait and act on provisions later in the year. The country’s second-biggest lender, BBVA, did the same.

Other Spanish banks also reporting shortly, such as CaixaBank, Popular and Banesto, have already covered part or all of their provisioning needs by retaining profits in the first quarter.

One of Spain’s healthier lenders, Bankinter, last week posted a sharp drop in profit due to provisioning. .

WORRYING TRENDS

Analysts said Sabadell’s underlying business was exposed to worrying trends in a sinking economy.

“While we welcome the clean-up, we still see risks on further asset quality and sovereign deterioration, making us remain cautious,” JP Morgan said in a note to clients.

Sabadell is part of a group of seven Spanish lenders which will be in focus in a new round of independent stress tests of the banking sector to determine which banks will need to tap the European credit lifeline.

As European policymakers hope the rescue plan will break the vicious link between sovereign and banking risks, the lender said on Wednesday it did not increase its sovereign debt holdings in the last few months.

“We’ve not increased our position, we’ve maintained it or even reduced it in the last months,” Sabadell chairman Josep Oliu told a news conference.

Chief Executive Officer Jaume Guardiola said the bank did buy Spanish sovereign debt earlier this year when lenders benefited from cheap loans from the European Central Bank but did not acquire any new paper recently.

It bought Alicante-based savings bank CAM - so badly hit by soured property loans the state had to step in - for the symbolic sum of 1 euro in December last year.

Sabadell said the acquisition resulted in a negative goodwill gain of 933 million euros that partially helped offset the profit decline in the first half. Negative goodwill is a gain booked when the price paid for an acquisition is less than fair value of the assets.

But the integration of CAM also caused non-performing loans to rise to 7.82 percent of the total loan book by the end of June from 6.02 percent in March.

Net interest income - the difference between what a bank earns on loans and what it pays out on deposits - rose 11.7 percent to 854.3 million euros, slightly above a Reuters’ poll, boosted by cheap financing from the European Central Bank.

$1 = 0.8275 euros Editing by Erica Billingham and David Cowell

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