Spain's fund managers welcome stress test results

With 95% of the Spanish banking system under scrutiny, compared to an average of 65% in the rest of Europe, the bank stress test hung like a sword of Damocles over the fragile Spanish economy and its troubled banking system, but fund managers in the country have responded positively to the results.

There were plenty of reasons for Spain's relative over-representation in the test; among the troubled PIIGS (Portugal, Ireland, Italy, Greece and Spain), Spain is seen as having the most worrying combination of economic health and weight within the European economy.

With five Spanish banks (Unnim, Cajasur, Diada, Espiga and Banca Civica) among the seven failing to pass the test, Spain has been the worse performing country by a distance.

On the other hand, the Spanish authorities pushed hard for the test and insisted on publishing the results to show the relative soundness of the Spanish banking sector.

Leading Spanish equity fund managers Aviva’s Iván Martín and Antonio Hormigos from Mirabaud Gestión spoke to Citywire about the implications of the test results.

‘The test has shown that our financial system is bipolar,' said Martín. 'Among the 91 banks tested, we have both the best and the worst. We have the best bank in Europe, Banca March, - with a stressed tier one capital ratio of 19% - as well as Banco Santander and BBVA among the best. But at the bottom, there is Diada Bank with a 3.9% tier one ratio.'

‘Considering this, the results show a quite solvent banking sector. Besides, the funds needed to recapitalise the failed cajas would be less than €1.9 billion or 0.2% of GDP’ said Martín.

Hormigos (pictured above) thinks the results are good for the system as a whole.

‘The test was especially aimed at clearing doubts over the Spanish system. Well, some banks need more capital but it is not a figure out of reach at all,’ said Hormigos

The fund managers are divided on whether the benchmarks used in valuations of property assets was flawed and has resulted in overvalued assets.

‘The test included aggressive price falls in unfinished homes (-50%) and land (-63%) in its worst-case scenario. Some home developments in Spain might be worth nothing and should be demolished. Good quality assets in downtowns may not fall so much but some developments in the outskirts of the cities or in the coast will actually experience such cuts or even bigger ones. Hence the haircuts applied were no so hypothetical,’ said Hormigos.

Martín thinks ‘the valuation system is flawed, among other reasons, by the fact that most real estate appraisal agencies are owned or controlled by banking sector’.

The question remains whether the results are comparable with other countries.