MADRID (Reuters) - Spanish banks could see a rise in legal claims related to an historic method for pricing mortgages that could have a big impact on their profits, the Bank of Spain said on Tuesday.
Spain’s mortgage rate index (IRPH) was an alternative to Euribor used for pricing floating-rate mortgages, and was based on the mean of mortgage yields sold by banks.
It was scrapped by the government in 2013, following criticism it did not allow customers to benefit sufficiently from lower interest rates.
Spain’s Supreme Court ruled in 2017 the index did not constitute an abuse of the market and that its use in contracts was transparent as the IRPH was an official measure approved and published by the Bank of Spain.
However, customers and lower courts have challenged this decision at the European Court of Justice (ECJ).
On Tuesday, the Bank of Spain said a final decision by the ECJ was expected in the second half of the year, and that a ruling against banks could cost them dearly.
“Given previous litigation experience, in particular related to the sale of mortgages with floor clauses, these legal processes may have a (...) significant time extension, as well as a material impact on the profit of the lenders,” it said as part of its twice-yearly report on domestic lenders.
However a source at the Bank of Spain said on Tuesday it was not asking Spanish lenders to set aside provisions against mortgage litigation risks as the ECJ decision was pending.
“Provisions have to be made when you have an objective risk, an objective decision, when you can calculate it reliably, here there is no decision from the court,” the source said, adding that the only thing the bank was telling lenders was that “it would be good for them to measure this (risk)”.
Brokers such as Spanish investment firm Alantra estimate a worst-case loss for the banks of up to 10 billion euros.
A spokesman for the ECJ said the general advocate would issue a non-binding statement on June 24.
Among Spanish lenders, Caixabank has an outstanding exposure of 6.7 billion euros to IRPH mortgage contracts, BBVA around 4 billion euros, Bankia, 1.6 billion euros, and Sabadell, less than 800 million euros.
According to analysts at Alantra, Santander has an outstanding exposure of 4 billion euros. Santander declined to give a number.
After it was scrapped, the IRPH was replaced by a fixed rate of around 2 percent, which has acted as a floor for mortgage rates as Euribor rates have fallen steadily since.
Like other European banks, Spanish lenders are struggling to lift earnings as ultra-low interest rates are squeezing their financial margins.
They are also battling to overcome the legacy of Spain’s real estate bubble, which burst in 2007 and saddled lenders with billions in toxic real estate assets that ultimately led to a 41.3 billion euro ($46.3 billion) public bail-out.
The number of lenders in Spain has shrank from 55 before 2008 to just 12 as they have attempted to improve profitability.
The IRPH is one of a number of mortgage-related problems Spanish banks have had to face.
Last year, the Spanish government countered a court ruling that would have forced customers to pay mortgage stamp duty by pledging a law obliging banks to pay the tax.
Two years earlier, the ECJ overturned a Spanish court ruling that had capped banks’ liabilities for mortgage floor contracts.
By the start of this year, Spanish banks had paid back 2.2 billion euros to customers for what they lost on those mortgages, according to Bank of Spain figures on Tuesday, with lenders setting aside 1.9 billion euros in provisions against 2016 results.
Reporting by Jesús Aguado; Editing by Paul Day, Mark Potter and Alexander Smith