The Spanish financial system is performing better than the euro area as a whole in terms of credit quality. The country’s institutions have reduced both doubtful loans and loans on special watch, those that have not yet defaulted but there are indications that they may do so, in the last year. Specifically, with regard to loans at risk of default, the Spanish financial sector has removed a volume of credit of €17.1 billion  from surveillance. 

Thus, the current volume of special surveillance loans held by banks is €191.2 billion at June 2022, compared with €208.3 at the end of the first half of 2021, which represents a reduction of around 8%. Thus, according to the latest data published by the European Banking Authority (EBA), the special surveillance credit ratio of Spanish institutions fell from 7.3% in June 2021 to 6.7% in June 2022.

With this ratio, the Spanish financial sector is below the average for euro area institutions, which have a volume of loans under special surveillance of 9.5%. In fact, European institutions as a whole have increased the volume of loans at risk of default by 14% in the last year, to € 1.48 trillion as of June this year, compared with €1.2 trillion in the same period last year.

The situation of non-performing loans

The case of non-performing loans  (NPL) in the euro area has declined over the last year. The NPL ratio in June 2021 was 2.3% and in the same month of this year it is 1.8%. The Spanish financial sector, which includes institutions beyond the traditional credit banks, has also been in line with this decline, with the NPL ratio falling from 3.1% to 2.8% in the same period, according to EBA data, to €78.9 billion. However, with this rate, the national sector’s NPL ratio remains well above the average for the euro area, only surpassed by that of eight countries: Greece (5.2%), Poland (4.3%), Hungary (3.7%), Cyprus (3.6%), Bulgaria (3.5%), Portugal (3.3%), Croatia (2.9%) and Romania (2.9%).

In view of the risks for banks that could result from a worsening of the euro area economy, and also the Spanish economy, due to the rise in interest rates, persistent inflation and the increase in raw material and energy prices, European and national supervisors are urging banks to be prudent in their provisioning policy, as although non-performing loans are falling, they expect impairment to begin to be reflected in a two-year scenario.

National banks, on the other hand, assure that, for the moment, no deterioration has been noted and, although they admit that the first problems will come from the side of micro-SMEs, SMEs and the self-employed, they assure that the sector is protected since it has not used the bulk of the provisions made during the pandemic. In fact, the six Spanish listed institutions have reduced provisions for credit losses by 22% from June 2021 to June 2022 in their national activity, to 2.1 billion. Supervisors also call for prudence in the capital strategy.

Original Story: El Economista | Eva Díaz 
Edition and translation: Prime Yield