Consumer credit default hits its highest level since 2016

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