Spanish banks face $4.2 billion hit from European court's loan ruling

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MADRID Spanish banks face having to repay customers more than 4 billion euros ($4.2 billion) after the European Court of Justice unexpectedly overturned a Spanish court ruling capping liabilities relating to a disputed mortgage clause.

Banks will now have to compensate customers for what they lost on the mortgages before May 2013, when Spain's Supreme Court declared them invalid if they had not been presented clearly. The home loans had an interest rate that could not fall below a benchmark, meaning customers lost out on the lower mortgage cost when rates dropped beneath this level.

The ruling knocked shares in Banco Sabadell (SABE.MC), Banco Popular (POP.MC), Caixabank (CABK.MC) and Liberbank (LBK.MC) -- the banks most exposed to these "floor clauses", which a Bank of Spain source said could have an additional impact of "slightly more than" 4 billion euros on the country's banks.

Most Spanish banks have since removed the clauses, which were introduced as a safety net during the financial crisis, from their mortgage products and set aside money to cover compensation of around 5 billion euros ($5.2 billion) that the Spanish court ruled had been incorrectly charged.

Analysts had estimated that the new charges under the European court's ruling would add between 3 billion and 4.5 billion euros to the total bill.

"Spanish case-law placing a temporal limitation on the effects of the invalidity of 'floor clauses' included in mortgage loan contracts in Spain is incompatible with EU law," the court said in its written ruling.

The ruling, which banks and analysts were not expecting, is final and cannot be appealed, an EU court spokeswoman said.

Shares in Popular, already under pressure after shareholders forced out Chairman Angel Ron over his failure to clean up 30 billion euros ($32 billion) in toxic assets, were down 6.9 percent by 0935 GMT.

Caixabank, Spain's third-biggest lender, has said previously said it could face a 1.25-billion-euro charge if had to repay clients for the whole life of the loan. Caixabank shares were down 5.3 percent.

Sabadell and Popular are both liable for about 700 million euros. Liberbank and state-owned Bankia (BKIA.MC) are liable respectively for 259 million euros and 200 million euros.

(Editing by Angus Berwick and Alexander Smith)

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