Neil Day reports.
Ironically, as the financial crisis has fed through into the real economy around the world, and the strong growth that has characterised Spain in recent years has shown ever-clearer signs of faltering, the countrys banks have receded from the headlines that were screaming their names at the turn of the year.
When banks liquidity and funding were the main focus of market observers, Spanish banks found themselves under an unwanted and, they would argue, unwarranted degree of scrutiny. Specifically, analysts, both professional and amateur, appeared obsessed with the extent to which the Spanish financial system was dependent on the European Central Bank for liquidity.
Spanish banks were described as the most vulnerable in Europe, with the country apparently fated to be the next to suffer a collapse such as that of Northern Rock in the UK. "Just look at the billions of euros of asset backed securities that are being rated but not placed in the public markets," observers remarked. "This is all being repod with the ECB."
But it wasnt, and Spanish representatives became increasingly irritated and vocal at the criticisms. Soledad Nuñez, director general of treasury and financial policy for the Kingdom of Spain, for example, said in February that such gossip was unfounded.
"The liquidity they get from the ECB is just below 10% [of what the ECB is providing], which is below the share of the Spanish banks in the complete banking sector in the eurozone, so it means that some of the other countries go above," she said, adding that proportion even included funding for foreign banks Spanish branches.
She also questioned the conclusions being drawn about the fate of Spanish ABS issuance.
"It is true that Spanish banks have been acquiring securitisation bonds, but that has been to make a pool just in case they need it in the future," said Nuñez. "Right now they have a much bigger pool of assets than they are putting in the ECB."
Six months on, such talk still bubbles away, but the market now has other countries and sectors in its sights. Analysts might also have found their doom-saying just a little over the top after another potential UK collapse was averted when Alliance & Leicester was taken over by Santander.
The move was not wholly unexpected, given that the Spanish bank had already cast its eye over the UK mortgage lender in late 2007. However, Santander making use of the strong currency that its outperforming share price gave it to stabilise a part of the European banking system was the reverse of what might have been expected from the bearish talk earlier in the year.
And as recently as mid-September, Santander was said to be one of five banks and the only non-US one to take a look at Washington Mutuals books as the US Treasury sought to find a buyer to avert another collapse or bailout after Fannie Mae and Freddie Mac, Lehman Brothers and AIG.
The power of retail
Representatives of Spanish banks have, meanwhile, not shied away from pointing out that the countrys financial institutions resisted the temptations and worst excesses of the ABS market. This is undeniably true, although a strict Bank of Spain which many had previously complained about and easy profits at home made this perhaps less of a judgement call than good luck.
But whichever way you look at it, the retail focus of Spanish banks have stood them in good stead in the turbulent markets of the past year.
"The role of retail networks as funding mechanisms is much stronger in Spain than in the rest of Europe," says Reyes Bover, head of fixed income origination at Banco Bilbao Vizcaya Argentaria in Madrid. "Deposits typically make up 50%-60% of total assets, which results in a lower reliance on the wholesale capital markets.
"In the current market environment, retail deposits are an easily manageable and consistent source of funding."
Pablo Llado, managing director, capital markets, Spain and Portugal, at Calyon in Madrid, agrees. "If you look at what has been going on throughout this crisis, the ones that have big retail networks, like the banks in Spain, will be the ones that succeed," he says.
He also points out that competition on this front has increased in Spain.
"We have seen banks and savings banks paying high rates on deposits because the wholesale markets have been almost closed and they have been relying on retail deposits for an even greater proportion of their funding," he adds.
The slowdown in the Spanish economy has nevertheless eased the pressure on the countrys banks to raise funding overall.
"It is worth highlighting that funding needs this year have been lower than in the past as a result of more selective credit policies and lower economic activity," says Bover. "The decrease in issuance volume of 50% in plain vanilla issuance versus 2007 is therefore in line with lower asset growth which is in the single digits, compared to a minimum of 25% in recent years."
Such considerations explain why the top Spanish banks have been able to access the FIG bond market more easily than some peers elsewhere. Santander, for example, sold a Eu2bn 3-1/2 year fixed rate issue through Morgan Stanley, Royal Bank of Scotland and Santander at 80bp over mid-swaps at the end of July to a warm reception.
"I am not surprised that this has worked well," said a syndicate official away from the leads. "It is a good spread, at a good part of the curve, and Santander is a very popular name at the moment."
Indeed one of the leads described Santander as one of the best for investors.
"They have very high name recognition and are the biggest bank in Spain," he explained. "As quite a few accounts will only look at the top two or three issuers in each country, Santander really benefits from this ranking."
However, just as this remark will have been encouraging for Spains biggest players, it also highlighted the way in which smaller issuers have found the market less hospitable.
Indeed while higher rated banks not only from Spain but elsewhere in Europe, too have found the relative costs of the senior unsecured market favourable compared to covered bond issuance, some bankers suggest that for other issuers the cédulas market remains a more viable option.
"Cédulas are the only asset I would trust, in general terms, to re-open the market," says Jesus Saez, head of debt origination for Spain at Natixis in Madrid. "For many issuers, placing senior debt in the market does not appear to be possible in these current conditions.
"A mixture of factors are pushing the spreads of Spanish paper wider and even if there might be a price at which a new senior deal could be issued, it would be at a level that many cannot assume because of the return on assets they show."
Smaller banks favour cédulas
But even if the market in late September was more hostile to issuance than ever, there have nevertheless been opportunities for Spains smaller institutions, to access senior funding at various times through the year. Bover at BBVA, for example, points out that the bank has led more than 10 senior debt issues for Spanish savings banks this year, partly by tailoring the structure through puts, calls and other features to meet issuers needs and investors interest.
Another banker points out that investors focus on the short end of the curve has meant that senior funding has made more sense than covered bond funding, even when the latter might have been available.
"Cédulas have traditionally been used as a long term funding instrument by Spanish issuers," says the banker, "tapping 10 years and longer. This policy has been proven wise by the current market conditions, since most of the outstanding cédulas will not mature until 2012 and onwards.
"Meanwhile the fact that the tenor that has been accessible this year is two years made some issuers switch to senior debt as it is more efficient in this part of the curve, given that the collateral consumption and the relatively smaller difference in pricing."
If senior debt and covered bonds have struggled to offer interesting options for Spanish financial institutions at many points during the year, then subordinated forms of capital have proven even less attractive.
"There have not been any public benchmark subordinated transactions," says BBVAs Bover. "In the current environment, the most subordinated products are the most challenging to place, being the last in the payment chain.
"And in a credit spread widening scenario, the premiums required to tap the subordinated debt market have grown exponentially."
Whereas the tier one paper of Spanish double-A names, for example, previously traded at around 50bp over senior paper, it now trades at five times the senior level.
"For their part," adds Bover, "Spanish financial institutions have very solid and stable capital ratios, above 7%, and at current levels it is not efficient to issue these products if they are not necessary. There have only been some opportunistic small deals in the private placement market."
Just what the future holds for Spanish financial institutions, and their exercises in the capital markets, will depend on whether their confidence in the face of the crisis is borne out or the criticisms they have faced turn out to be justified.
Spains savings banks have appeared the most vulnerable to a downturn, partly because of the geographic concentration risks that many face, with several having been downgraded in recent months. At the beginning of August, for example, Moodys downgraded the senior unsecured ratings of three Spanish savings banks involved in covered bond issuance from A1 to A2.
Negative ratings actions on Spains larger, commercial banks have been much rarer, but not totally absent. In mid-September Moodys downgraded the senior unsecured rating of Banco Pastor from A1 to A2 citing a "rapid deterioration in loan quality".
"We would generally not exclude the possibility of more rating actions to be performed on Spanish entities in the near future as a result of the further deceleration in the Spanish housing market," said analysts at Barclays Capital in response to Moodys rating action.