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Spain's Popular bad loans jump, sees worse to come

MADRID - Spanish bank Popular said its non-performing loans jumped in the third quarter, following the collapse of property developer Martinsa Fadesa, and a sluggish economy will restrict loan growth next year.

Popular, Spain's third-largest bank by market capitalisation, said on Friday that bad loans hit 2.19 percent at the end of September from 1.42 percent at end-June, when the bank gave a full-year target for 2.0-2.5 percent.

Chief Executive Roberto Higuera warned: ‘2008 will see intense non-performing loan growth and this trend will continue into the first quarter.’

The bank also posted a 3 percent rise in net profit to 956 million euros for the first nine months of the year, which was slightly below analysts' forecasts.

At 1220 GMT, Popular shares were down 7.6 percent at 6.22 euros, while the wider market was 6.7 percent lower.

Spain's banks have weathered the global financial crisis in relatively good shape. However the liquidity drought forced the government to announce a fund, still to be created, worth up to 50 billion euros to buy top-quality assets from banks. The state will also guarantee new bank debt of up to 100 billion euros this year and a still-to-be-determined amount in 2009.

So far, no Spanish banks have asked for government help. However they are exposed to a steep property slump, after a decade in which house prices tripled thanks to easy credit and construction grew to account for roughly 18 percent of gross domestic product.

Higuera said Popular would cope with crisis. ‘We are calm ahead regarding what is to come in terms of rising bad loans and a difficult economic situation,’ Higuera told a conference call.

Higuera reiterated that the bank is targeting a core capital ratio, a measure of financial strength, of 7 percent by the end of the year. That would put it in line with the average ratio for European banks, which analysts at Keefe, Bruyette & Woods put at about 6.8 percent.

‘At a first glance, results look in line with expectations on the operating front. Also, asset quality deterioration, volume growth and margins were relatively in line,’ said Tiago Bossa Dionisio, an analyst at Espirito Santo Investment.

BAD LOANS RISING

Popular will use a combination of existing liquidity and capital gains from asset sales to offset the impact of rising bad loans.

In the third quarter, Higuera said Popular booked capital gains of 800 million to 1.0 billion euros from property sales.

Popular said it provisioned 1.96 billion euros ($2.51 billion) for insolvencies in the nine-month period.

The bank said it had continued to build up a second line of liquidity to enable it to face any ongoing drought in the interbank markets and noted that this reached over 13.35 billion euros at end-September.

Higuera said overall loan growth would be slow in 2009 as the economy shrinks. He sees Spain registering negative economic growth in the third and fourth quarters of 2008 and the first quarter of 2009 on a quarter-on-quarter basis.

‘So that means that overall demand for loans is going to be low in the second half of the year, and particularly in the first half of 2009,’ he said.

‘We expect lower growth rates in lending next year, probably low digit, depending very much on GDP growth,’ said Higuera.

In the nine months to September, Popular posted a 5.7 percent rise in lending to 91.96 billion euros.

A Reuters poll of seven analysts had forecast net profit of 974.8 million euros and net interest income of 1.889 billion euros.

Deposits, excluding investment funds, rose 2.8 percent, while net interest income rose 10.3 percent to 1.89 billion euros, boosted by recurrent earnings from the bank's core retail banking business.