Moody’s has placed on review for downgrade five Spanish covered bond issuers and is expanding outstanding reviews of seven others as part of wider rating action on Spanish banks resulting from concerns about deteriorating asset quality in the real estate sector and the banks’ earnings generation capacity.

The rating agency yesterday (Monday) placed on review for possible downgrade the ratings of eight Spanish banks and two holding companies: Banco Cooperativo; Banco Sabadell; Bankia and its holding company, Banco Financiero y de Ahorro (BFA); Bankinter; CaixaBank and its holding company, La Caixa; Confederacion Espanola de Cajas de Ahorro (CECA); Caja Rural de Granada; Ibercaja Banco; and Lico Leasing.

“This follows the rating agency’s reassessment of the financial strength of all Spanish banks reflecting increased loss expectations with respect to their commercial real estate exposure and an anticipation of reduced earnings generation capacity available to strengthen provisions or capital in light of the weakened growth outlook for the Spanish economy,” said Moody’s.

The rating agency is also expanding reviews of seven banks involved in mergers to incorporate the above considerations. The ratings of Unicaja, Caja Vital, Banco Popular and NCG Banco remain under review for downgrade, while the ratings of Bilbao Bizkaia Kutxa, Banco CEISS and Banco Pastor remain under review for upgrade.

Moody’s has also placed on review for upgrade ratings of Banco CAM, following its acquisition by Banco Sabadell, announced on Wednesday. The review will also take into consideration the impact of such integration on the bank’s credit profile.

The rating agency noted that the rate of non-performing loans (NPL) in the real estate sector has exceeded the level reached in the crisis in the early 1990s and continues to rise, especially for developer exposures, with no sign of abating. Moody’s said that there is a lack of liquidity in the real estate market, illustrated by a continued increase in the stock of real estate properties that banks are acquiring from delinquent borrowers or as a result of foreclosures.

“The level of activity in some of these asset classes is too low to establish credible benchmark valuations,” it said. “When set alongside the decline in prices observed since 2008, significant doubts persist regarding real estate valuations and the adequacy of impairments and provisions taken so far by many banks.”

Moody’s review will also take into account banks’ internal capital generation capacity, assessing the adequacy of banks’ capital cushions to cope with more severe deterioration in asset quality, especially in the real estate sector.

The review will also take into account the banks’ liquidity in an increasingly tough funding environment.

“Most Spanish banks face restricted access to market funding while concentration of market maturities in the following year are high,” said Moody’s. “Access to funds from the European Central Bank and retail deposits remain the two key remaining funding pillars.”