IRPH ruling adds to Spanish banks’ litigation risk but likely impacts manageable

The impact of the ECJ Advocate General’s ruling that Spanish banks may have violated the EU’s 1993 Directive on unfair terms in consumer contracts by referencing mortgages to the IRPH index will be more contained than many observers fear.

Since Spain’s real-estate crisis, the widely-used IRPH mortgage-rate index has declined much less than Euribor – the gap averaging 2% in the past decade. Borrowers with IRPH-linked mortgages have therefore missed out on the windfall from falling rates, have felt deceived so have started suing the banks.

As of Q2 2019, the top eight Spanish banks (Banco Santander, BBVA, Caixabank, Bankia, Sabadell, Kutxabank, Unicaja and Liberbank) had EUR 17.4bn of IRPH mortgage exposure; Caixabank alone accounting for EUR 6.4bn. This number does not include mortgages that have been repaid.

Estimates as to the potential liability weighing on the banks are wide-ranging, from a few billion to tens of billions. Consumer association ASUFIN believes up to a million customers could be affected, with an average cost per customer of EUR 25,000. This would put the total potential liability for the banks at EUR 25bn.

“We believe the final hit to banks will be lower than suggested by ASUFIN,” said Marco Troiano, deputy head of the financial institutions team at Scope Ratings, in a Q&A on this topic out today. “Given that the IRPH is a widely-used official index, we think that proving mis-selling should be harder than in the case of the much less transparent mortgage floors. On top of that, not all affected customers are likely to file claims and it is not clear how far back the courts will rule retroactively,” Troiano said.

Banks faced similar challenges with respect to mortgage floors (clausulas suelo), with the courts deeming the clauses void, forcing the banks to pay back all interest retroactively. Fewer than a third of eligible customers have filed any claims related to mortgage floors, for example. And as of January 2019, total customer redress amounted to only EUR 2.2bn.

“Taking the ASUFIN numbers as a basis for our estimate and assuming that only a third of affected customers make a claim with a success rate of 40%, we calculate the potential liability at EUR 3.3bn, which would represent a small nuisance and a drag to profitability for the sector but should not concern credit investors,” Troiano said.

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