Spanish bank profits, already depleted by a sickly economy and property losses that resulted massive bailouts last year, could take a further knock from an overhaul of controversial mortgages.
Mid-sized lenders in particular, including those that have not needed state aid, could see earnings plummet as they come under pressure to follow some rivals in removing mortgage clauses that protected them against falls in interest rates.
The so-called floor rates prevent interest paid by homeowners from dropping below a certain level despite fluctuations in Euribor, a euro zone benchmark rate to which many home loans are linked.
Spain's second-biggest bank, BBVA (BBVA.MC), said this week that it would stop using the floors after the Supreme Court reaffirmed a ruling that invalidated the clauses if they had not been presented clearly to clients.
The bank said that the ruling would cost it 35 million euros ($46.6 million) in lost net profit this month. BBVA's full-year net profit was 1.67 billion euros in 2012, down 44 pct on 2011 because of soured property loans.
Even banks that were not directly targeted by the Supreme Court case may have to change their mortgage contracts amid growing public pressure and an expected increase in lawsuits filed by borrowers.
"Any other lawsuit now is going to go the same way," said Hermenegildo Garcia, a spokesman for consumer rights group Ausbanc, which brought the original case against BBVA, state-owned NCG Banco and savings bank Cajamar.
Spain's People's Ombudswoman, who is charged with defending citizens' interests, called on Friday for the central bank to force all lenders to apply the Supreme Court ruling. The Bank of Spain declined to comment.
SABADELL, POPULAR IN SPOTLIGHT
The biggest challenge facing Spanish banks is how to ramp up revenue while the country remains in a deep recession and borrower defaults keep growing.
Many lenders suffered heavy losses last year when the government imposed a clean-up of soured property assets and the country had to ask for 41 billion euros of European aid for the weakest banks.
Sabadell (SABE.MC) and Banco Popular (POP.MC), which did not need state aid, are among the banks that would be worst hit by changes to their mortgage contracts because they used the floors more than most, analysts said.
One-year Euribor rates are at 0.504 percent, while average rate floors on mortgages are about 3.2 percent at Sabadell and 2.8 percent at Popular, analysts at BPI said.
Andres Carballosa, a part-time hospital worker in Madrid, said he has begun a lawsuit against Sabadell. He estimates that he is overpaying by 200 euros a month on his mortgage because of the floor rates, which he says he was unaware of when he took out the loan.
The two lenders said that they are not affected by the latest ruling and are not planning to alter their mortgage structures.
But Popular, which this week said it was reviewing this year's 500 million euro profit target, said that the removal of the clauses would theoretically shave off 53 million euros from its 2013 net profit.
About 25-30 percent of Sabadell's residential mortgage book, equivalent to 12 billion euros, contains these floor rates, and analysts at Credit Suisse estimated that their elimination could wipe out 12 percent of this year's lending income.
"We see no reason to own Spanish banks at this point," the Credit Suisse analysts said in a note.
Santander (SAN.MC), Spain's biggest bank, said that it has practically no mortgages with such clauses.
At BBVA, based on the expected loss in June and assuming Euribor remains unchanged, mortgage profits would be hit by 245 million euros by the end of the year.
