The ECB’s interest rate hikes have boosted banks’ profits after years of low profitability, but the change of scenario has had its downside. Customers are now suffering a growing increase in the cost of their debts and this has forced banks to sharply increase provisions in anticipation of a rise in non-performing loans (NPL).

In the first part of the year, the six large Spanish banks listed on the Ibex added €10.868 in provisions to face a possible default  , an increase of 27% compared to €8.537 billion the previous year, according to a report by the consulting firm Accuracy.

This is considerably higher than the combined profits in Spain of the six banks, Santander, BBVA, CaixaBank, Sabadell, Bankinter and Unicaja, of €5.373 billion in the first half of the year, 49% higher than a year ago. This is despite the fact that the banks are still flush with liquidity, the Achilles heel that precipitated the falls of Silicon Valley Bank and Credit Suisse. Including international activity, the profit for the half year was around €12.4 billion.

The ECB recently warned that the near-term outlook for the economy has deteriorated due to a contraction in demand. The central bank says tighter financing conditions are behind the trend, which may prove key in determining whether it will raise interest rates beyond 4.25%.

Among Spanish banks, the only ones that have not raised provisions have been Unicaja and Sabadell, the latter due to positive impacts on its real estate portfolio and litigation. Santander, on the other hand, raised loan-loss provisions sharply in anticipation of a worse performance by customers, especially in the United States. They rose from €5.770 billion a year ago to €7.426 billion in the first half of the year. This is a rise of 28%.

BBVA has increased provisions by 36%, to €2.087 million, compared with 19% for CaixaBank, to €556 million, and 26% for Bankinter, to €193 million. In the case of CaixaBank, these provisions actually fell in the second quarter compared to the first due to the improved macroeconomic outlook in Spain, but the picture for the half-year as a whole continues to show increases.

For the time being, these movements are part of the preventive manoeuvres before the foreseeable arrival of storm clouds that have yet to appear on the balance sheets of Spanish banks. Santander’s NPL ratio has remained at 3.1%, while those of BBVA and CaixaBank have fallen, in the first case from 3.7% to 3.4% and in the second from 3.1% to 2.6%. On the other hand, Sabadell’s rose to 3.5% and Unicaja’s to 3.6%.

There is another warning light that is also still off. When a loan passes to special surveillance risk it is computed as stage 2 and when the risk is doubtful, it passes to stage 3. These are the two steps prior to default, which have their own accounting drawers and allow banks to anticipate the danger. At the end of the first half of the year, stage 1 and stage 2 of the banks’ accounts amounted to €226.13 billion, just €367 million more than a year ago.

Original Story: La Vanguardia | Iñaki de las Heras 
Photo: CaixaBank website
Edition and translation: Prime Yield