Spain gives lenders green light to reclassify €30bn of DTAs

The government of Spain has told Banco Santander, BBVA, Caixabank and other domestic lenders that they can reclassify €30bn worth of deferred tax assets as tax credits, in a move that is designed to bolster their regulatory capital ahead of next year's Europe-wide bank stress test.

The move, approved by the cabinet on Friday, follows months of intense lobbying by Spanish banking chiefs, who warned that the country's financial sector was being put at a disadvantage to other European lenders under the existing regime. Italy already gave its banks a similar helping hand in 2011.

DTAs arise when a bank makes losses or incurs provisions that it can later offset against its tax bill. Under the new Basel III regime, such assets can no longer be counted as regulatory capital - a change that could have forced weakly capitalised lenders to raise billions in additional funding. Tax credits, in contrast, will still count towards a bank's capital cushion under Basel III.

The move comes amid a flurry of action by Spanish banks to strengthen their balance sheets through disposals, listings and by raising fresh capital. BBVA last month sold down its stake in a Chinese lender to avoid the penalty that Basel III attaches to large financial holdings.

Santander and Banco Popular sold their property management arms this month, while Caixabank and the La Caixa foundation have issued shares and exchangeable bonds.

These measures will be dwarfed, however, by the financial impact of the government announcement made on Friday. Across the sector, Spanish banks have amassed more than €70bn in DTAs, of which about €50bn are linked to their operations in Spain itself - equivalent to 40 per cent of core equity tier one capital.

In the case of Bankia, the nationalised former savings bank, DTAs account for more than 80 per cent of tangible book value, according to research published this year by N+1, the investment bank. The corresponding figure for Santander, Spain's biggest bank by assets, was still about 40 per cent.

Shares in Spanish banks were broadly unchanged on Friday, suggesting investors had mostly priced in the widely anticipated move. Analysts also pointed out that the shift, though welcome, did little to bolster the banks' underlying financial strength.

"This is a change in the regulatory treatment of capital. There is no change to the real equity loss absorption capacity of the banks. This does not change a bank's real ability to withstand losses," said Daragh Quinn, a Madrid-based banking analyst for Nomura, the investment bank.

The main benefit of the Spanish move, analysts said, was that it was likely to reduce the regulatory pressure on banks such as Bankia and Sabadell, two lenders that have been particularly reliant on DTAs, to raise additional capital as a result of the Basel III change.

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