Defaults in consumer credit have once again experienced an upturn that puts banks on their guard. There are several portfolios of doubtful loans on the market to reduce the NPL ratio, which has once again exceeded 7% and has reached the highest level in eight years.

This is shown by the latest data from the Bank of Spain on doubtful loans in financial credit establishments (EFC), which go up to April. These institutions specialise in consumer credit. Although not all consumer credit is in this niche – some banks channel it without CFCs – it is the best approximation for assessing the trend and health of the segment.

Since the covid crisis, the delinquency rate of SCIs has been on an upward trend, although it is gradually experiencing a significant decline, which can be explained by the sale of doubtful portfolios by these institutions to opportunistic funds that buy unpaid loans at a discount. In this case, the discount applied can exceed 90%.

The latest statistics point to a new increase in non-performing consumer loans, up to €3,060 million, compared with €2,852 million in the same month of the previous year. There has been a year-on-year increase of 7.3%, and the NPL ratio has risen to 7.18%, the highest level since May 2016.

On several occasions over the past four years, NPLs have touched 7%, but have always been reduced afterwards by the loan drain. On this occasion, the increase in NPLs can be explained both by the rise in NPLs and by the fall in the total volume of outstanding credit of SCIs, which acts as the denominator, and which fell by €1,111 million between March and April, to €42,638 million.

The Bank of Spain has observed this further deterioration in consumer credit quality, although it is not alarming. As the deputy governor and acting governor, Margarita Delgado, pointed out at the APIE forum in Santander, there has been an 8% increase in loans under special surveillance in consumer lending.

 Consumer credit is always the first warning sign of a possible worsening of the stock of loans on banks’ balance sheets, as households always default sooner, in case of need, on a contract of this type than on a mortgage. These are loans with higher rates and without collateral.

In the banking balance sheet as a whole, the overall NPL ratio remains contained, and in April stood at 3.6%, with a volume of non-performing loans of €42,141 million, compared with a total outstanding stock of €1.17 trillion.

Original Story: El Confidencial | Author: Óscar Giménez
Edition and Translation: Prime Yield