Spanish Banks Drop on Surprise EU Ruling, Which is Final and Binding

Spanish banks are lower today after Brussels decided Spanish banks must repay customers $4.2b — in relation to a mortgage clause.

I’m sure the good bankers in Spain did plenty to receive this slap on the wrist. But the headline of this story cannot be ignored, which is a panel of aristocrats in Brussels just passed judgement on Spain, a ruling that came as a surprise and is final and binding, meaning it cannot be appealed.

And then they wonder why the people want out of the EU.

source: Reuters

Banks will have to compensate customers for what they lost even before May 2013, when Spain’s Supreme Court declared the mortgages invalid if they had not been presented clearly. The home loans had an interest rate that could not fall below a benchmark, meaning customers lost out on the lower mortgage cost when rates dropped beneath this level.

New charges resulting from Wednesday’s European Court of Justice ruling could eat into bank earnings, which have already been eroded by record low interest rates and fierce competition for a shrunken loan pool, and encourage more mergers.

Banco Popular, the sector’s weak link and seen as a potential takeover target, faces about 330 million euros in new charges. Its shares led losses among Spanish banks and were down 6.6 percent by 1300 GMT.

The ruling also knocked shares in Banco Sabadell, Caixabank, BBVA and Liberbank — the banks most exposed to the “floor clauses,” which were introduced as a safety net during the financial crisis.

BBVA and Caixabank have said it could cost them 1.2 billion euros and 750 million euros respectively.

Most Spanish banks have removed the clauses from their mortgage products since the 2013 Spanish court ruling and already set aside money to cover compensation of around 5 billion euros that the court ruled had been incorrectly charged.

A Bank of Spain source said this could have an additional impact of “slightly more” than 4 billion euros on the country’s banks, in line with analysts’ predictions. Analysts expect an average hit of around 30 basis points on capital ratios.

The ruling, which was widely unexpected by the banks, is final and cannot be appealed, an EU court spokeswoman said.
The case first arose after several Spaniards said that banks had hidden the floor clauses in their mortgage contracts. The ECJ ruling could now open the door to 2 million others seeking repayment from banks, consumer lobby group Adicae said.

In response to the ruling, the Spanish banking association said banks were open to renegotiating with clients but they wanted more details to know how to apply the decision under Spanish law. Spain’s Socialist party called for measures so that people could recover their money as quickly as possible.

It is still unclear, however, how the banks will go about repaying customers.

Banco Sabadell, which said its mortgages were still valid as they had been presented clearly, could be liable for new charges worth 490 million euros, according to Deutsche Bank analysts.

BBVA, Spain’s second largest bank, said the ruling would knock its full-year earnings for 2016 by 404 million euros. BBVA shares were down 1.9 percent by 1300 GMT, while next largest lender Caixabank’s were down 2.5 percent smaller lender Liberbank, which in relation to its size is the most affected, is liable for 259 million euros. Banco Santander, Spain’s largest bank, was among the least impacted as it did not use mortgage floors.

I don’t expect this or the Italian banking crisis to have any last effects on stocks, not while the ECB is printing $80b per mo for QE.