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Spanish banks adopting risky strategy in buying property to avoid bad loans

Spain's eight biggest banks last year formed or resurrected property wings that have bought up €7.8 billion worth of property from struggling home-owners and developers.

'The banks are taking on a huge number of assets and they are now having to strengthen their real estate units to manage this avalanche,' said Emilio Rotondo, a Fortis analyst.

The main threat to Spanish banks has come not from the toxic US mortgage debt that has wrecked the US and UK property markets, but a rapidly deepening recession propelling their bad loan rate to an expected 7% this year and 9% in 2010 from 2.8% last October.

Mindful of the need to keep bad loans to a minimum, bankers are doing everything to stop another major Spanish developer filing for administration as Spain's biggest house builder Martinsa Fadesa did last summer.

'By buying real estate assets the banks stop loans becoming bad loans. In so doing, the client's debt with the bank is cancelled and they avoid not only increasing bad loans, but they also avoid having to make more provisions,' explained Nuria Alvarez, an analyst at Madrid brokerage Renta 4.

Analysts are warning that the banks' haste to buy property, rather than allow failing businesses to go bust only delays future loan losses that will hit sooner or later as the market takes years to revive.

Standard & Poors has said it expects house prices to fall 30% from peak to trough and may not hit bottom until 2010.

'I'm sure that if asset values were 10% below their book value banks would be more than happy to sell them tomorrow. The problem is that you can't get rid of them, so they will have to keep them and take the pain little by little,' said Antonio Ramirez, a London based analyst at Keefe Bruyette & Wood.

Some, however, see a positive sign to the trend. Jagoba Garcia, an analyst with Fox Pitt Kelton said that by buying before a company files creditor protection, banks get to pick prime assets rather than scraps. 'You are in a better position than when you have to divide up any spoils with other creditors,' he said.