Doubtful debts of credit institutions increase and are close to €3 billion. Banks suffer the first increase in defaults in this way.

 The possibility of non-performing loans (NPLs) spiralling out of control is one of the biggest threats in the financial sector since the coronavirus began. For now, it is contained in banking, but there is already a path of increase in consumer credit, where the default has reached 7% – the highest level since 2016, according to the latest release from the Bank of Spain.

The report, which covers the period up to March, demonstrates that NPL in credit financial institutions rose by 5.5% monthly, to €2.982 billion, against a total credit stock of €42.096 billion. This is therefore an NPL ratio of 7.08%, up from 6.88% in February, and the highest level since May 2016.

CBEs account for a large part of consumer credit, although not all of it, but the segment’s NPLs figure serves as an approximation of the trend. These establishments are companies with their own legal status that are part of banking groups, or in some cases are independent firms, which are dedicated to granting personal loans.

However, the perimeter of consumer credit is larger. While in the banking sector as a whole it remains contained, with €51.485 billion in doubtful loans and an NPL ratio of 4.24% in March, lower than in February, there has been an upturn in consumer credit. Non-payments increased in December, during the Christmas sales campaign, marred by the omicron. That month it rose from 6.56% to 6.89%, and now it has risen again. 

Before the pandemic started, in February 2020, the default rate was 5.81%. Thus, there is an increase of more than one percentage point. You have to go all the way back to May 2016 to find a higher record in the historical series, although it is still far from the historical highs of over 11% in 2014.

These consumer loans are not secured by mortgages or other collateral, and recoveries are more difficult. Banks often bundle defaults into portfolios and sell them to opportunistic funds at discounts of up to 95%. In this sense, there is an appetite for funds to buy this year, after two years with less activity.

Experts were already anticipating that the first upturn in defaults should come in consumer credit. The question is when we will see the increase in companies, and whether it will reach mortgages, for which the economy would have to continue to deteriorate in the midst of a change in the monetary policy cycle with interest rate rises. 

The unknown is in the business sector, where there has been an increase in debt with the ICO loans that kept many companies afloat. Some healthy and others that were no longer sustainable and could become zombie companies. Default is almost frozen in companies with the bankruptcy moratorium, which expires on 30 June, but for which it is not yet known whether there will be another extension. The Bank of Spain estimates that 20% of ICO loans are under special surveillance by banks.

Original Story:El Confidencial |Oscar Gimenez
Photo: Photo by Pablo Rodríguez from FreeImages
Edition and translation: Prime Yield

The combined weight of NPL accounts for 24% of those granted to the sectors most affected by the pandemic.

The Bank of Spain’s Financial Stability Report confirms that loans under special surveillance have grown by 14% at the end of 2021 compared to 2020. “The ratio of loans under special surveillance continued to increase, particularly in the sectors most affected by the pandemic, where the nonperforming (NPL) loans ratio also increased slightly,” explains the regulator’s spring report.

A credit is classified as NPL when it accumulates defaults of more than three months or for an amount exceeding 25% of the debt. Its predecessor is credit under special surveillance: these are those in which, even though no default event has occurred, a significant increase in credit risk has been observed since the time of granting. According to the Financial Stability Report, the combined weight of NPL and loans under special surveillance accounts for 24% of the credit granted to the sectors most affected by the pandemic, 18% in the moderately affected sectors and 15% in the remaining sectors. 

Original Story: Diário Siglo XXI | Press
Photo: Photo by Victor Iglesias in FreeImages
Edition: Prime Yield
 

Caixabank raised its key profitability target for 2024 and announced a €1.8 billion share buy-back programme, expecting higher interest rates and economic recovery to boost banking revenue.

As part of a new strategic plan, Spain’s biggest domestic lender by assets said it planned to grow revenue by around 7% between 2022 and 2024, driven by an increase in insurance income and moderate growth in fees and commissions.

Against this backdrop, Caixabank targeted a return on tangible equity ratio (ROTE), a measure of profitability, of above 12% by 2024 from an adjusted 7.2% at the end of 2021.

The lender forecast Spain’s economic growth at an average 3.4% over the three years of the plan, boosting demand for mortgages and consumer loans.

It said that while the war in the Ukraine and its effects on energy prices would slow the pace of recovery in the short term, that would be offset by the return of foreign tourists, the normalisation of saving rates and the roll-out of EU funds.

Spanish banks, with a purely retail model, have been among the hardest hit by ultra low interest rates and are expected to benefit from tighter monetary policy.

Caixabank said it expected the 12-month Euribor rates curve to rise from an average of -0.5% in 2021 to 1.5–1.6% in 2023–24.

Net interest income – earnings on loans minus deposit costs – would rise by 8% in the period, the bank said, while its cost-to-income ratio would fall to below 48% from 58% at end-2021 thanks also to cost savings from its Bankia acquisition.

Higher cost of risk, BPI to grow revenues 9%

The bank plans to generate capital of around €9 billion, including a dividend payout policy of more than 50%, a €1.8 billion share buy-back to be distributed this year, or 7.7% of its outstanding capital, and solvency excess over 12%. The bank has a capital target of 11% to 12%.

Broker Jefferies said that revenue upsides would be partly offset by costs, with the bank targeting costs of 6.3 billion in 2024 versus consensus expectations at €6.0 billion and a step up in provisions.

Caixabank expected cost of risk, which measures the cost of managing credit risks and potential losses for the bank, to be lower than 35 basis points by 2024 from a target of around 25 basis points for this year.

The bank said its Portuguese subsidiary BPI is expected to grow revenues at an annual average rate of around 9%, with profitability and efficiency converging with those of the whole group.

Original Story: Reuters | Jesús Aguado 
Photo: Caixa Bank website
Edition: Prime Yield

Spain’s Caixabank adequate provisions to face potential future losses given the current market uncertainty, the bank’s Chief Executive Officer Gonzalo Gortazar said.

“At the end of 2021, the unallocated amount of the pandemic-related provision is more than €1.4 billion, so we are comfortable with the existing cushion to absorb any losses that might happen,” Gortazar told shareholders during the bank’s annual meeting.

Caixabank’s pandemic-related provisions fell by around a fifth in 2021 compared to the previous year, boosting the lender’s recurrent net profit by more than 70%.

The Bank of Spain is monitoring the evolution of state-backed loans granted in the pandemic as repayment freezes are lifted and indirect impacts from the Ukraine war show up in credit portfolios.

The central bank’s Director General for Supervision Mercedes Olano said that she expected an increase in bad loans but that should be manageable as Spanish banks’ exposure to Russia was limited.

Gortazar told investors that Caixabank was confident that credit quality this year would remain at “very adequate” levels.

At the end of December, the bank’s non-performing loans (NPL) accounted for 3.6% of total lending, in line with the previous quarter.

Shareholders are expected to approve a gross cash dividend of 0.1463 euros per share against 2021 earnings, representing a 50% pay-out. 

Caixabank aims for a dividend cash pay-out policy of between 50-60% of 2022 consolidated earnings.Investors will also be asked to approve a reduction of the group’s outstanding share capital of up to 10%.

Original story: Reuters | Jesus Aguado 
Photo: CaixaBank website
Edition: Prime Yield

The Bank of Spain told lenders to adequately monitor credit risks of some of their customers most exposed to the economic impact from Russia’s invasion of Ukraine and urged banks not to release provisions given the current uncertainty.

“In view of the new shock, we will have to closely monitor the effects of the crisis on institutions and their borrowers,” Bank of Spain Governor Pablo Hernandez de Cos said in the presentation of the central bank’s supervisory report.

He said lenders needed to maintain a high degree of prudence, with “appropriate and early recognition of the associated risks, in order to preserve confidence in the sector and to facilitate the continued flow of credit to the economy”.

Last April 5^th, the central bank lowered its economic growth forecasts for 2022 and 2023.  

Deputy Governor Margarita Delgado warned in the report that “it is important that lenders…do not release provisions until uncertainties dissipate.”  

Spanish banks such as Santander and Sabadell have recently started to release provisions, mainly in the United States and Britain.

Although Spanish lenders have little exposure to Russian credit, estimated at just above €700 million by the central bank, they fear an indirect impact of high energy prices on some of their customers. 

Analysts have also warned that the conflict could delay interest rate hikes in the long run, and Delgado said it was “difficult to establish clear scenarios for the evolution of interest rates”.

She saw a more limited scope for further domestic mergers but growing chances of cross-border deals in Europe. The number of significant lenders in Spain has dropped to 10 from 55 before the 2008 financial crisis.

Despite a significant rise in property prices in 2021, De Cos did not see any evidence of a “clear overheating in the Spanish real estate sector”, but said the bank would closely monitor its performance. Spain’s property price index rose 6.4% in the fourth quarter, the biggest increase since early 2019.

Original story: Reuters | Jesus Aguado 
Photo: Bank of Spain website
Edition: Prime Yield

Spain’s state rescue fund FROB has increased its stake in the country’s “bad bank” Sareb to more than 50%, in line with a European Union order to count its liabilities as public debt.

FROB said it had bought a 4.24% stake in Sareb, set up in 2012 to take on bad loans after the financial crisis, to raise its holding to 50.14%. No price was given but several sources with knowledge of the matter said it was merely symbolic.

The move comes after the government in January approved a legal framework allowing FROB to surpass the 50% threshold in Sareb following the EU order.

FROB didn’t say which banks had sold their stakes but a source at Sareb said some smaller holders, such as Bankinter, had tendered their stakes. Bankinter declined comment.

Santander remains the biggest private shareholder with a 22.2% stake, followed by Caixabank with 12.2%.

Several Spanish banks have been planning to sell their stakes in Sareb, which has struggled since its creation as a slump in real estate prices has depressed the value of loans and assets, but most had retained their holdings for tax reasons.

After selling 17.1 billion euros of all debt issued, Sareb still holds 33.7 billion euros in senior debt.

Original story: Reuters | Jesús Aguado 
Photo: Sareb Linked IN
Edition: Prime Yield

The Spanish banks are monitoring about €50 billion in loans guaranteed by the Official Credit Institute (ICO) granted to companies from problematic sectors, for fear of non-payment. This is the equivalent to one out of every two euros lent by the sector with the public guarantee, according to data handled by the consultancy firm Axis Corporate.

The firm points out that 50% of the total financing provided with ICO guarantees is concentrated in five economic sectors that, by their nature, “have been significantly affected by the pandemic”. 

Specifically, of the €50 billion, €14.8 billion come from the tourism, leisure and culture sector, €10.7 billion from the construction and infrastructure area, €8.8 billion from business and professional services, €8.2 billion from capital and industrial goods and €7.6 billion from food and beverage distribution.

The data compiled by Axis Corporate warns that part of these credits “are deteriorating quite rapidly”. Thus, it points out that in the sectors most affected by the pandemic there has been an increase in the rate of doubtful credit of 30% compared to the previous half-year (with data to half of 2021) and expects this growth to continue to increase in the coming months, which would explain why the Bank of Spain has been reluctant to financial institutions to release provisions.

In addition, Axis Corporate has found that more than 40% of the companies that have requested ICO guarantees to meet their obligations required changes of term and/or grace period, as they were unable to comply with them, and the payment time in the private sector “has grown significantly” throughout 2021, to stand at over 90 days.

“Although this delay in payment has become commonplace in our economy, 27% of companies see the viability of their business compromised if payment delays become structural. Another particularly worrying figure is found in the ratio of non-payment of invoices, which has risen from 3.1% in 2019 to 5.4% in 2020 and 4.8% in 2021, which, if not corrected, would mean an increase in the non-fulfilment of companies’ financial obligations”, the consultancy firm warned.

Axis warns that this situation is aggravated by the current economic situation, with inflation soaring, energy costs at record highs and the war in Ukraine.

Although the government is planning to make available to the most affected sectors another line of guarantees amounting to €10 billion of the €36 billion still available from the line of guarantees of the coronavirus, as well as extending the maturity of loans guaranteed by the ICO and the grace period for the most affected sectors, the firm argues that, “if there are no drastic changes in the economic environment, these measures may only succeed in delaying beyond the second quarter of 2022 the massive influx of defaults”.

Original story: Europa Press| Europa Press | 
Photo:Photo by Pablo Rodríguez on FreeImages
Translation and edition: Prime Yield