GOLDMAN SACHS: Here's The Worst Case Scenario For Spanish Banks After Bankia

Goldman’s equity research desk covering Spanish banks is out with an overview of the Bankia recapitalization plan and a “read-across” to the potential recapitalization needs of the next six biggest Spanish banks in the sector.

The analysts note an important difference between their original loss estimates for Bankia and the recent announcement of the €19bn recapitalization figure: while Goldman essentially estimated the same level of credit impairments that Bankia announced, Goldman was giving Bankia the “benefit of a 2-year credit buffer (essentially 2-years of pre-provision profit stream).” Apparently Bankia itself assumed no such benefit when calculating its own capital needs.

The worst case scenario Goldman presents thus discounts pre-provision profits (PPP) to come to estimates of total capital needed for each of the major Spanish banks. Goldman explains this discounting by pointing out that “the market is likely to be selective, giving only the strongest institutions the benefit of doubt with regards to future PPP sustainability. For some, front-loading losses might be the only viable option to ease increasing market concerns.

In this worst case scenario, where all pre-provision profit streams generated by the Spanish banking sector over the next two years are discounted, here is Goldman’s breakdown of capital needs for each Spanish bank:

The composition is as follows: CABK (€6.9 bn) SAN (€6.8bn), POP (€6.3 bn), BBVA (€3.6 bn), BTO (€3.3 bn), BKT (€1 bn)


Photo: Goldman Sachs

However, the Goldman equity analysts are relatively more sanguine in their analysis of what they perceive to be the most likely scenario in the Spanish banking system. They write, “Still, when it comes to a number of listed institutions – particularly Santander and BBVA – we believe that dismissing PPP is unjustified. We therefore view Exhibit 6 as the more relevant, especially for the international banks.”

Here are Goldman’s estimates for recapitalization needs for each bank without discounting the next two years of profit streams:

The composition here is as follows (see exhibit 6): POP (€4.2 bn), CABK (€3.3 bn), BTO (€1.9 bn), BKT (€0.5 bn)


Photo: Goldman Sachs

It will be important to keep a close eye on the Bankia recapitalization to determine how the process shakes out across the rest of the Spanish banking system. Goldman provides this timeline of the Bankia recapitalization with key events between now and October:


Photo: Goldman Sachs


See also: JP MORGAN: A Spanish Bailout Would Cost €350 Billion

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