Citi Research projectsthat Spanish banks will sell problem assets at discounts at around 10% to 15% by 2018. According to analysts, 16.9% of the total domestic assets in Spain are considered problem assets.

Analysts at Citi Research noted that one of the most important challenges confronting banks in Spain is the quality of their assets.

The rate NPL formation is still the most widely used measure, but the research firm emphasized that other problem asset developments such as foreclosure, substandard loans, developer and restructured performing loans are also equally important factors.

Stefan Nedialkov and Ronit Ghose evaluate the quality of Spanish bank assets

Citi Research analysts Stefan Nedialkov and Ronit Ghose evaluated the quality of assets of Spanish bank and they found that 16.9% of domestic assets in the second quarter of 2013 fall under the category of problem assets.

Spanish Banks Problem Assets

The Spanish banks would shed its problem assets

Nedialkov and Ghose project that each of the Spanish banks would shed its problem assets. The analysts anticipate the reduction would be around c30% until 2016, and most of the foreclosed assets should be sold at discounts of approximately c10% to 15% by 2018. The peak of asset reduction would be next year.

Spanish Banks Asset Reduction

The analysts evaluated the assets of six banks including Spain including Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) (MCE:BBVA), Banco Popular Espanol SA (MCE:POP), Banco de Sabadell SA (MCE:SAB), Banco Santander (NYSE:SAN) (MCE:SAN), Bankinter SA (MCE:BKT), and CaixaBank SA (MCE:CABK). According to them, the collective problem assets of the banks are 36.1%

According to Nediakov and Ghose, the problem assets are comprised of non-performing loans  including 6.2% of domestic Spanish assets, foreclosed assets 3.7%, restructured performing loans 3%, developer performing loans 2.2%, and substandard loans 1.8%.

The analysts noted that Banco Popular Espanol SA (MCE:POP) has the highest level of problem assets and NPL content with 27.6% and 10.4% of its total assets, respectively. On the other hand, Bankinter SA (OTCMKTS:BKNIY) (MCE:BKT) has the lowest with 7.3% while Banco de Sabadell SA (MCE:SAB) is in the mid-higher level with 22.6%. The problem assets of the three other banks are between the range of 12% to 18%.

Nediakov and Ghose noted that over the past several months that a significant number of foreclosed real estate assets were sold in Spain. For example, Banco de Sabadell SA (MCE:SAB) sold a portfolio worth €90 million to foreign investors. The regional government of Madrid and the City of Madrid also sold real estate holdings.

According to the analysts, Banco Popular Espanol SA (MCE:POP) and Banco de Sabadell SA (MCE:SAB) have the largest amount of foreclosed assets. During the second quarter of this year, Pop and SAB sold 6% and 10% of their foreclosed portfolio, respectively. CaixaBank SA (MCE:CABK) sold 16% and Bankinter SA (OTCMKTS:BKNIY) (MCE:BKT) sold 45% of its foreclosed assets. The analysts estimated that sales discounts on the assets were around 4% to 11%.

“We expect gross inflows into foreclosed assets to be close to zero by 2016 and the stock to be c€19 billion from a peak of c€ 40 billion at end of 2014. The pace of sales should accelerate to 45% of the then existing stock so that the last of the foreclosed assets should be sold by 2018,” wrote Nediakov and Ghose.

Among the six banks, the analysts recommended a Buy rating for Bankinter SA (OTCMKTS:BKNIY) (MCE:BKT) because it has the lowest percentage of problem assets.