Spain’s Caixabank has chosen prudence before profit. By offloading most of 12.8 billion euros in real estate assets to private equity outfit Lone Star, the Valencia-based lender has agreed to forgo future benefits from rising property prices. All in all it’s the right call.
Granted, it’s also something of a volte-face. Previously, Caixabank had guided that it would slowly drip property sales out into a recovering market and capture any upside in the form of writebacks on loans which had been heavily written down in value to reflect Spain’s post-crisis property crash. House price growth is forecast to accelerate to 4 percent year-on-year in 2018 thanks to robust housing demand and GDP growth of 2.6 percent.
Still, an implied price of 6.7 billion euros comes with no additional losses. That’s because the loans were sold approximately where they were provisioned at, equivalent to roughly half their gross book value. Compared to Banco Santander and BBVA, which recently sold dud property loans for around one-third and 38 percent of their gross value respectively, Caixabank has got a good deal.
And the easy money has probably been made. Prices troughed in 2014 and have now recovered to around 80 percent of their pre-crisis highs, according to central bank data, implying limited upside. More importantly, it allows Caixabank to get out of the landlord business and focus on what should be its core competency: lending. Loan growth should receive a boon as Spain’s long deleveraging cycle is forecast to end this year.
After the transaction, Caixabank’s Spanish non-performing asset ratio should roughly halve to a healthy 6.5 percent, according to Jeffries analysts. The lender’s pro forma common equity Tier one capital ratio will rise by a net 15 basis points to 11.7 percent, close to Its 12 percent target. And the fact that Caixa will no longer have to maintain the properties should mean cumulative pre-tax cost savings of 550 million euros between 2019 and 2021, helping returns exceed the bank’s 10 percent cost of capital. Which in turn would imply that a valuation of one times book is, if anything, ungenerous. Reuters
