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

Swedish debt management specialist Intrum has reached an agreement to buy 100% of its rival Haya Real Estate, owned by US fund Cerberus, for 140 million euros, the companies announced in a joint statement on early may.

The transaction will integrate Haya into Intrum’s structure in Spain, thus expanding its client portfolio and volume of assets under management. Specifically, Haya manages more than 11 billion euros in 105,000 real estate assets, which will now be added to Intrum’s portfolio. The Nordic firm is listed on Nasdaq Stockholm and is active in credit and asset management. It has a presence in 25 countries in Europe and Latin America, and last year it expanded its presence in Spain by acquiring the 20% stake in Solvia held by Banco Sabadell. The deal announced on Thursday will see the integration of a team of more than 550 professionals. The companies expect the deal to be completed in the third quarter of this year, once it is approved by the regulator. The bondholders, who represent approximately 60% of Haya’s 340.3 million debt, have already given the go-ahead.

The Cerberus fund had long sought to divest itself of the real estate asset manager, which was founded in 2013 in the heat of the real estate crisis to manage Bankia’s assets. The decision to divest from Haya accelerated from 2018, when the company’s IPO for more than €1bn was thwarted. At that time it had more than €39,884 million in assets under management by Bankia, Sareb, Cajamar, Liberbank, BBVA and other financial institutions. And the valuation of the servicer (the anglicism used to describe these companies in real estate jargon) exceeded 1.2 billion.

While the sale did not come to fruition, the outbreak of the pandemic opened a restructuring process as a result of Haya’s financial problems. Last year, the company led by Enrique Dancausa agreed an ERE for 185 employees after losing contracts to manage assets from Sareb and Unicaja. The agreement announced Thursday, the companies say, will strengthen Intrum’s relationship with Cerberus, one of the largest investors in non-performing asset portfolios (real estate and non-performing loans) globally. And it will expand the Swedish group’s business with some of Spain’s leading financial institutions such as BBVA, CaixaBank and Cajamar.

In addition, the company highlights that the purchase addresses one of the organisation’s strategic priorities for 2023, by accelerating its commercial development and strengthening its secured credit and real estate asset management business.

Original Story: El País | Sandra López Letón
Photo: Intrum website
Translation: Prime Yield

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

Spain’s Santander has agreed to sell a portfolio of distressed loans with a gross value of 1.1 billion euros ($1.21 billion) to U.S. private equity fund Cerberus and real estate loan manager Axactor, Expansion reported on May 5th.

The loan portfolio, dubbed ‘Spirit project’, includes personal loans, some mortgages, and loans to medium and small companies, Expansion said, citing unidentified financial sources.

Expansion did not mention the price or potential discount on the sale of the portfolio, but said the transaction was split into two tranches.

The first loan portfolio, of around 660 million euros, was sold to Gescobro, a Spanish unit of Cerberus, and the second, of around 440 million euros, to Axactor, it said.

Santander declined to comment, while Cerberus and Axactor did not immediately reply to a request for comment.

Spanish banks were very active in the past in shedding real estate assets that went bad in the economic slump that followed the bursting of Spain’s real estate bubble at the end of 2007.

Lenders are now selectively repackaging loans in an attempt to recover some cash that could turn sour following the economic slowdown and the pandemic.Non-performing loans at Spanish banks were still hovering at near record lows of 3.55% in February, far below the all-time high of 13.6% in December of 2013

Original Story: Reuters | Newsroom
Photo: Facebook Santander
Edition: Prime Yield

Spanish households reduced more than 2.7 billion in loans for house purchases in January, in the midst of the rise in the Euribor, and reaching a volume not seen since May eight years ago.

The outstanding mortgage balance accelerated its fall in January. All the signs are that the Euribor will continue to be on the rocks for the rest of the year, as the European Central Bank (ECB) will have to be more aggressive if it wants to tame an inflation rate that still shows no signs of slowing down. And with the fear that mortgage repayments will continue to rise, families have opted to amortize mortgages as a measure of protection against their escalation and to save themselves an increase in interest, which is already eating into disposable income.

Thus, according to data from the Bank of Spain, in January, the outstanding mortgage balance decreased by €2,758 million, to €508,199 million, 0.54% less than in December 2022. This is the largest month-on-month reduction since May 2015, when households repaid €2,798 million. If the sum of December and January are taken into account, this volume fell by just over €5 billion (in total €5.207 billion). Moreover, the reductions in December and January are equivalent to those experienced between August and November 2022, months in which this trend could already be seen.

Everything points to the fact that the outstanding mortgage balance will continue to fall throughout the year. At the same time, so will the volume of new mortgages granted. Thus, according to data from the supervisory body, 2022 ended up exceeding 2021 (with €62,220 million granted compared with just over €59,000 million in 2021), although at the start of the year there has been a decrease compared with December, of just over €4,100 million, the lowest figure for the whole of 2022 (and in line with August due to lower activity).

And except for the months of August, we would have to go back to 2020, the year of the pandemic (where the granting of credit was impacted by restrictions not only on mobility, but also by greater caution on the part of banks) to see similar figures. 

This is nothing new; financial institutions were already expecting a slowdown in lending for house purchases at the beginning of the year, which would last throughout 2023. If we add to this a contained unemployment rate, this is yet another reason that financial institutions can use to avoid having to significantly increase provisions to cover doubtful loans. Indeed, the Bank of Spain has also noted a further tightening of access to credit.

Original Story: La Información | Cristina Casillas 
Photo: Photo by Philipp K in FreeImages
Edition and translation: Prime Yield

With European Central Bank policy makers preparing to hike interest rates yet again at their March meeting, Spanish banks have been paying their customers even less for their savings.

Spain’s lenders paid 0.37% on new household deposits with an agreed maturity of as long as one year in January, down from 0.42% in December, according to ECB data. By comparison, the rate for the savings of French families jumped to 2.34% from 2.13%, while Dutch banks paid 2.03%.

The trend for Iberian savers to get paid less is also seen at Openbank, the digital banking business that’s operated across several European markets by Banco Santander SA, Spain’s biggest lender.

A Spanish or Portuguese client earns a maximum annual rate of 0.2% on the savings account at Openbank, while a customer in the Netherlands can earn up to 1.5% for parking as much as €200,000 ($212,540) in a similar product, the bank said in response to questions. An account at Openbank’s German franchise pays 1%.

The issue of what lenders pay for savings is important because encouraging consumers to save instead of spend is key to the ECB’s efforts to bring inflation to heel. A further hike of 50 basis points in March — described as very likely by ECB President Christine Lagarde — would take its rate increases since July to 350 basis points.

“If credit is getting more expensive but savings are not getting the benefit, the transfer mechanism for monetary policy is not being fully employed,” Angel Talavera, head of European economics at Oxford Economics, said by phone. “Banks are just making more money and their balance sheets are getting stronger.”

Spanish lenders such as Santander are awash with customer funds and under no immediate pressure to offer more to attract savings.

“What really works in an economy is competition so we are in very competitive markets and we are adjusting to each market,” Santander Chairman Ana Botin said in an interview with Bloomberg TV last week.

Original Story: Bloomberg | Charles Penty and Macarena Muñoz 
Photo:Photo by Victor Iglesias from FreeImages
Edition: Prime Yield