The banking sector is on alert due to a stock of 87 billion in loans that remains under special surveillance. Despite the fact that in recent years banks have kept the average default on loan portfolios at bay, they have also been accumulating a greater volume of loans that are under maximum observation due to doubts that customers can meet their payment obligations.

Banks rule out the impact of non-performing loans and explain that they have been improving their NPL ratios in recent quarters. However, other sources familiar with the sector explain that in recent months there have been fears that a possible more unfavourable macroeconomic environment and tougher conditions imposed by banks due to interest rate rises could ignite the fuse that could cause the stock market to explode.

The Bank of Spain, in its latest Financial Stability Report, details that the volume of loans under special surveillance represents some 87 billion. To give an idea of the magnitude, this is 6.5% of Spanish GDP in 2022. The supervisor details in the document that the figure is 12% lower than the previous year, but also that it is still 24.5% of the level recorded before the pandemic.

Banking supervisors classify loans based on their payment quality: stage 1 (healthy credit), stage 2 (credit under special surveillance) and stage 3 (doubtful loans). Although the loans included in the second stage have not yet defaulted, banks have observed a significant increase in risk from the time of granting. This is the stage before impairments occur and therefore this bag is the focus of attention.

Original Story: Cinco Dias | Ricardo Sobrino
Photo: Banco de España
Translation: Prime Yield