Spanish banks lose European case over mortgage floor clauses

Yes that is correct. Spanish banks have lost a European Court of Justice case. Therefore the courts have ordered lenders to hand back to their clients all the money they made on “unfair” mortgage floor clauses.

Spain’s banking sector suffered an unexpected blow on Wednesday when the European Court of Justice ordered lenders to hand back to their clients all the money they made on “unfair” mortgage floor clauses.

The ruling exposes banks such as BBVA, Banco Sabadell, Caixabank, Banco Popular, and Liberbank to claims that could run into billions of euros. In response, shares in Popular were down 7 per cent in morning trading, with Sabadell and Caixabank dropping 3 per cent. Liberbank, a smaller Spanish lender, fell more than 13 per cent.

According to officials at the Bank of Spain, the worst-case scenario for the sector would see lenders having to pay back more than €4bn as a result of the ruling. In terms of additional provisions, analyst estimates suggest the main listed banks alone may need to set aside an extra €3bn. David Ruiz, a bank analyst at Afi, a Madrid-based consultancy, said: “The impact is substantial but very uneven.

Some banks are unaffected and in other cases the ruling could lead to dividend cuts and affect solvency. But it comes at a complicated time for the sector, with margins already very fine and interest rates very low.” Floor clauses in effect impose a minimum interest rate on floating-rate mortgages by setting a limit on how far mortgage rates can fall in tandem with the benchmark rate.

In practice, this meant that Spanish mortgage buyers did not profit fully from the record-low interest rate environment in recent years. The clauses were ruled illegal by the Spanish high court in 2013.

At the same time, the court decided that banks should not have to pay back the excess money they received as a result of the floor clauses before the ruling. That part of the decision was challenged by borrowers, and the Luxembourg-based European Court sided with them on Wednesday. “The situation of unfairness must have the effect of restoring the consumer to the situation that [the] consumer would have been in if that term had not existed,” the court said in a statement. “Consequently, the finding that ‘floor clauses’ are unfair must allow the restitution of advantages wrongly obtained by the seller or supplier to the consumer’s detriment.” Wednesday’s ruling means banks will now have to make substantial additional provisions, denting earnings at a time when the sector is already struggling to maintain profitability.

According to research by Keefe, Bruyette & Woods, the main listed banks — BBVA, Caixabank, Bankia, Popular, Sabadell and Liberbank — could now be forced to make additional provisions worth €2.9bn. BBVA said in a statement to the regulator that it expected to take a hit to 2016 earnings of €404m as a result of the ruling. Popular, which is in the middle of a complex restructuring, said it was expecting an impact of €334m. Andrew Lowe, bank analyst at Berenberg, said the midsized lender was “likely to be the biggest loser, as it has very little headroom and is already facing pressure to raise further capital”. In relative terms, Liberbank is also likely to take a significant hit. Deutsche Bank said the impact from the court’s decision would take 90 basis points off the lender’s capital cushion Banco Santander, Spain’s biggest bank by market value, is not affected by the ruling because it never used floor clauses.

Wednesday’s ruling was not bargained for. A preliminary opinion handed down by the court’s advocate general in July agreed with the initial Spanish decision, and advised the court to reject pre-2013 payback claims.

The opinion is not binding on the court, but the judges follow it all the same in the majority of cases.

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