By Jesús Aguado and Angus Berwick
MADRID (Reuters) - Spanish banks must repay customers more than 4 billion euros ($4.2 billion) after Europe's top court unexpectedly overturned 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 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.
New charges resulting from Wednesday's European Court of Justice ruling 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.
Banco Popular (MC:POP), the sector's weak link and seen as a potential takeover target, faces about 330 million euros in new charges. Its shares led losses among Spanish banks and were down 6.6 percent by 1300 GMT.
The ruling also knocked shares in Banco Sabadell (MC:SABE), Caixabank, BBVA and Liberbank (MC:LBK) -- the banks most exposed to the "floor clauses," which were introduced as a safety net during the financial crisis.
BBVA (MC:BBVA) and Caixabank (MC:CABK) have said it could cost them 1.2 billion euros and 750 million euros respectively.
Most Spanish banks have removed the clauses from their mortgage products since the 2013 Spanish court ruling and already set aside money to cover compensation of around 5 billion euros 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 euros on the country's banks, in line with analysts' predictions. Analysts expect an average hit of around 30 basis points on capital ratios.
NO APPEAL
The ruling, which was widely unexpected by the banks, is final and cannot be appealed, an EU court spokeswoman said.
The case first arose after several Spaniards said that banks had hidden the floor clauses in their mortgage contracts. The ECJ ruling could now open the door to 2 million others seeking repayment from banks, consumer lobby group Adicae said.
"It follows that national case-law, such as that following from the judgment of 9 May 2013, ... ensures only limited protection for consumers," the ECJ said in its written ruling. "Such protection is therefore incomplete and insufficient."
In response to the ruling, 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. Spain's Socialist party called for measures so that people could recover their money as quickly as possible.
It is still unclear, however, how the banks will go about repaying customers.
Banco Sabadell, which said its mortgages were still valid as they had been presented clearly, could be liable for new charges worth 490 million euros, according to Deutsche Bank (DE:DBKGn) analysts.
BBVA, Spain's second largest bank, said the ruling would knock its full-year earnings for 2016 by 404 million euros. BBVA shares were down 1.9 percent by 1300 GMT, while next largest lender Caixabank's were down 2.5 percent
Smaller lender Liberbank, which in relation to its size is the most affected, is liable for 259 million euros. Banco Santander (MC:SAN), Spain's largest bank, was among the least impacted as it did not use mortgage floors.
