Standard and Poor's Rating Services said it has raised its estimates for loan losses for Spain's banking sector between 2009 and 2011 due to the faster depreciation of real estate assets on banks' books.
Bad loans were seen rising to 99.3 billion euros ($123 billion) over the period, up from an initial estimate for 81.6 billion, S&P said.
"It will come as no surprise that most of the (banks) loan losses are a result of their exposure to Spain's property sector given its sharp correction," the ratings agency said Monday.
Spain's banks, and particularly the 45 unlisted savings banks, invested heavily in the real estate sector during a decade-long boom and are now suffering the impact of the sector downturn.
Property prices have begun to stabilize after falling sharply from early 2008, though some estimates suggest banks have around 700,000 to 1 million properties still on their books.
Last week, the Bank of Spain said it was carrying out stress tests on all banks, savings banks and cooperatives and planned to publish the results on a bank-by-bank basis.
The savings banks are currently immersed in a whirlwind consolidation process aimed at recapitalizing weaker institutions and halving their numbers. The government has set up a fund to finance the sector restructuring which expires end-June.
As a result of the upward revision of estimates for loan losses and its view that there will be a tougher medium-term economic environment, S&P said it took ratings actions on seven Spanish banks whose business is mostly concentrated in Spain.
"Most of the outlooks are negative, reflecting the possibility that loan and operating performance may worsen more than we currently expect in a tough economic environment," S&P said.
The banks reviewed include the country's top two savings banks La Caixa and Caja Madrid, both involved in merger processes, and Basque savings bank Kutxa.
Listed retail bank Popular saw its negative outlook affirmed.
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