MADRID • Spanish banks must repay customers more than €4 billion (S$6.04 billion) after Europe's top court overturned on Wednesday a Spanish ruling that capped liabilities relating to a disputed mortgage clause, posing a new challenge to some lenders.
Banks will have to compensate customers for what they lost even before May 2013, when Spain's Supreme Court declared the mortgages invalid if the terms had not been presented clearly.
The home loans had an interest rate that could not fall below a certain level, meaning customers missed out when rates dropped below this level.
New charges resulting from the ruling by the European Court of Justice could eat into bank earnings, which have already been eroded by record low interest rates and fierce competition for a shrunken loan pool, and encourage more mergers.
Economy Minister Luis de Guindos told reporters the country's financial system was healthy and could deal with the consequences.
Banco Popular, the sector's weak link and seen as a potential takeover target, faces about €330 million in new charges. Its shares led losses among Spanish banks, falling 6 per cent to €0.954.
The ruling also knocked shares in Banco Sabadell, Caixabank, BBVA and Liberbank - the banks most exposed to the "floor clauses", which were introduced as a safety net during the financial crisis.
BBVA and Caixabank have said it could cost them €1.2 billion and €750 million respectively.
Most Spanish banks have removed the clauses since the 2013 ruling and already set aside money to cover compensation of around €5 billion that the court ruled had been incorrectly charged.
A Bank of Spain source said this could have an additional impact of "slightly more" than €4 billion on the country's banks, in line with analysts' predictions. Analysts expect an average hit of around 30 basis points on capital ratios.
The ruling, which was unexpected by the banks, is final and cannot be appealed against, an EU court spokesman said.
The case first arose after several Spaniards said banks had hidden the floor clauses in their mortgage contracts. The ruling could now open the door to two million others seeking repayment, consumer lobby group Adicae said.
In response, the Spanish banking association said banks were open to renegotiating with clients, but they wanted more details to know how to apply the decision under Spanish law.