Spanish banks would need to amortise around 10% of outstanding mortgage-backed covered bonds if revaluations were mandatory for all mortgage loans, said Fitch today (Thursday), with an analyst noting a Bank of Spain mention of the need to revalue loans.

Most Spanish lenders do not update property values after granting a mortgage, but doing so would be positive for investors in cédulas hipotecarias as it would boost transparency in cover pool analysis.

Property revaluations would also necessitate redemption of covered bonds because of the effect of house price declines in Spain since the crisis, according to Fitch.

“Given the distress in the Spanish property market, which has seen the Spanish house price index fall by around 30% to 35% since the onset of the Spanish crisis in 2008, mandatory property revaluations would push typical current loan-to-value (CLTV) ratios up and therefore shrink the size of the eligible cover pools (those with CLTV lower than 80% and 60% for residential and commercial mortgages),” said Fitch. “In turn, smaller eligible cover pools would force cédulas hipotecarias amortisation to comply with the minimum 25% overcollateralisation ratio established by law.”

Alvaro Utrera, Fitch

According to Alvaro Utrera, associate director, and Carlos Masip, director, at Fitch, the Bank of Spain in a draft circular from the autumn of 2013 suggested the need for Spanish banks to revalue their mortgage portfolios on an ongoing basis.

“The circular is only a draft, and relates to accounting standards, but if implemented we see direct implications for cédulas hipotecarias,” Utrera told The Covered Bond Report.

Masip said the rating agency is regularly asked about Spanish mortgage loan valuations by investors, and that it uses indexed values in its analysis.

“This became even more relevant after CaixaBank and BBVA conducted their revaluation exercises,” he said.

According to Fitch, if revaluations were mandatory for all mortgage loans, Spanish banks would need to amortise Eu30bn-Eu40bn of cédulas hipotecarias, equivalent to around 10% of the outstanding amount of Spanish mortgage backed covered bonds. However, it said that although this estimate “is material for the banking system”, it believes it is manageable as most Spanish banks have considerable amounts of retained cédulas hipotecarias that could be unwound if necessary. These covered bonds were not placed in the market but retained to access central bank liquidity if needed.

Carlos Masip, Fitch

The rating agency’s estimate is based on house price data from the Ministry of Development and assumes that all property valuations Fitch receives are original, said the rating agency, noting that widespread property revaluations carried out by CaixaBank and Banco Bilbao Vizcaya Argentaria (BBVA) provide “evidence of the practical impact of revaluations”.

At CaixaBank and BBVA, the revaluations triggered reductions of their eligible cover pools of Eu20bn and Eu6.7bn, respectively, according to Fitch, with the issuers in the same quarter amortising Eu13.5bn and Eu5.4bn of mortgage-backed covered bonds. Around three-quarters were retained cédulas while the remainder were scheduled redemptions, said the rating agency.

However, Fitch noted that the impact of revaluations on BBVA and CaixaBank may be greater than that on smaller lenders because larger Spanish banks have tended to maximise issuance of cédulas hipotecarias.

“[T]he amortisation requirement would reflect the size of any cushion above the legal minimum, as well as the quality of the collateral and the timing of any revaluation exercise,” said Fitch.