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13 A. The Condition of the Financial Sector 20.

The resilience of individual banks to the crisis has been markedly different, largely attributable to the varying business models and the differences in management quality and risk management philosophies. Thus, any analysis of the Spanish banking sector should necessarily differentiate the characteristics underpinning banks financial strength. This section aims to provide such an analysis, using supervisory databanks are categorized into four groups covering about 83 percent of the banking sector excluding foreign bank branches (Table 5): Large internationally active banks (G1). The two banks in this group are welldiversified in terms of their geographic footprints and business models. On a solo basis (Spain activities only) they account for about 33 percent of banking assets and almost half of the system at a consolidated level, with only one third of their net profits are generated domestically. Former savings banks that have not received any state support (G2). These seven banks account for approximately 17 percent of domestic banking sector assets, and most of their lending is focused on the residential housing market. Former savings banks that have received state support (G3). The seven banks in this group account for about 22 percent of sector assets; they rely significantly on the government/FROB for capital and liquidity support. Most of the banks included in this group show a high share of mortgage lending relative to their average balance sheet size, but most importantly, they are heavily exposed to real estate and construction-related lending. Medium and small private sector banks (G4). This group accounts for approximately 11 percent of domestic banking assets. Their main lending activities are concentrated in the corporate sector, with exposures to the real estate and construction sector being second only to G3. 21. The groups differ in terms of loan exposures (Table 6). Banks in G3 has the highest exposure to the real estate developer sector, with 19 percent of its loans made to this sector, and with the highest proportion in land loans (that are the hardest hit). G1 and G2 have the lowest exposures and mainly to finished buildings. G3 also has the largest proportion of foreclosed assets. 22. The profitability of the system has been adversely affected by provisioning needs, and capitalization is uneven across groups. G1 profitability is augmented by diversified international businesses, which contribute some 75 percent of profits. G3 has the lowest capital base, is loss making, and least efficient in terms of cost to revenue ratio. The groups are distinct also in terms of capital qualityG3 banks have a higher proportion of Tier 1 instruments (FROB 1 injections), which are not considered accounting capital.

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