'Deposit Wars' an Act of Desperation by Spanish Banks

Acts of Desperation

Looking for the next major thing in Spain to blow sky high? I have a strong candidate in mind.

Bank deposits are down 154 billion euros this year and banks have resorted to paying unsustainable interest rates as high as 8% to attract money.

Via Google translate from El Economista, please consider war rages over deposits: Spanish banks are "desperate".

A new war between Spanish banks deposits threatens to destroy their already depleted profit margins by offering higher interest to depositors to attract new customers in a desperate battle for scarce capital.

Entities found new ways to avoid legal restrictions and encourage customers to leave deposits to buy notes, products which are not protected by the Deposit Guarantee Fund.

Spain is in the spotlight of the debt crisis in the euro zone and many of its banks are unable to raise money in financial markets, forcing them to attract customers with deposits with annual rates above 4%, and that in some extreme cases reach 8% - a figure well above the average rates in the euro zone, amounting to 2.7% within two years.

Self-destructive strategy

"It's a self-defeating strategy," said a banking analyst in Madrid. "The margins are falling. When banks have to resort to such practices is because they are desperate," he added.

Most Spanish banks offer more than 3% for new customers who deposit at least $ 3,000 for a year or more, although some entities like People or Ibercaja offer more than 4%. While banks need capital, rates are likely to continue rising.

"There will probably be an intensification of the war in deposits this quarter to post some good numbers at the end of the year", said the chief executive of Bankinter, Maria Dolores Dancausa told analysts on a conference.

Depositors Beware!

"Superdepósitos" penalties were lifted in August and bank deposits have somewhat stabilized.

However, banks are paying far more for deposits than they can get for mortgages and other loans. Moreover the mortgage business and indeed the entire lending business in Spain is a disaster.

This setup cannot possibly end well for those chasing high rates, so it won't.

Bankia Revisited

Many Bankia investors thought they were making government guaranteed deposits, but in reality they were buying debt instruments later wiped out in bankruptcy. The same thing appears to be happening again.

Consider the May 29, 2012 Bloomberg article, Bankia Depositors Buying Bonds Leave Spain on Bailout Hook.

Bankia is among Spanish lenders that sold 22.4 billion euros ($28.2 billion) of preferred stock to individual investors through retail branches, according to data compiled by CNMV, the financial markets supervisor. In a so-called bail in, these investors would be wiped out before holders of more senior bonds, which tend to be banks and institutions.

Fernando Herrero, the secretary general of ADICAE, a Madrid-based association of clients of financial institutions, estimated that about 1 million Spanish households bought banks' preferred shares, some of which have been converted to common equity or subordinated convertible bonds.

"The instruments were marketed as very liquid and as safe as a deposit," said Herrero, who described issuing the risky securities to individual investors as an "original sin."

Next, consider my June 28, 2012 post Bankia Valued at EUR -13.635 Billion; Spain Becomes Sole Owner, Shareholders Totally Wiped Out; Entire Bankia Board Resigns.

Déjà Vu All Over Again

There is no way Spanish banks can pay 3% interest, let alone 8% interest on deposits. Anyone taking such offers is bound to get hammered down the road in debt-to-equity conversions.

Expect "Déjà Vu All Over Again" because more Bankia-type blowups are surely on the way.

Mike "Mish" Shedlock, a registered investment advisor representative at SitkaPacific, blogs at globaleconomicanalysis.com.