Stricter loan reclassification rules approved by the Bank of Spain will allow covered bond investors to better assess credit quality of cédulas cover pools, but will not reduce overcollateralisation, according to Moody’s, while Fitch noted that the move could hit bank earnings.

Under new rules approved by the Bank of Spain on 30 April Spanish banks have to reclassify the status of refinanced loans and increase provisioning for them to better reflect the credit risks associated with the loans, said the rating agency. Because banks have not been including the majority of forbearance loans in disclosed non-performing loan (NPL) figures the credit risks in covered bond cover pools have been masked, Moody’s said yesterday (Tuesday).

It expects the new rules to push most refinanced mortgage loans into riskier loan categories and thereby lead to higher NPL figures.

However, it sees the new provisioning rules as positive for investors in Spanish covered bonds because they will help reveal the true credit risk in cover pools, which has been masked by loan restructurings.

In addition, the new rules will not reduce overcollateralisation levels, said Moody’s.

“Issuers will only classify refinanced and restructured loans for provisioning purposes and will not write-off the loans,” it said. “Therefore, the refinanced and restructured loans will still form part of the total cover pool and not be removed in part or in full.”

Fitch also noted that comparability of asset quality would be enhanced today (Wednesday), but highlighted that additional loan impairment charges could further dent “already feeble” earnings and that this could ultimately filter through to capital, leaving some thinly capitalised banks vulnerable to downward ratings pressure.