Spanish banks, together with financial regulators such as the European Central Bank (ECB) and the Bank of Spain, confirm that bank arrears will start to rise at some point due to the rise in interest rates, which translates into a greater financial effort for companies and families with variable credits, inflation and the rise in the price of energy, as well as the expected slowdown in the economy. However, for the moment and publicly, they refuse to put a date on when this upturn will be seen. However, as elEconomista.es has learned, internal forecasts from several of the country’s large banks already point to non-performing loans beginning to flourish in the second quarter of 2023.

The forecast that delinquency is going to get worse has sounded like a mantra since the pandemic broke out in Spain. However, the measures implemented by the government and banks to alleviate the effects of Covid-19, such as the ERTEs, credit moratoriums and loans guaranteed by the ICO, together with the ECB’s lax monetary policy, have anaesthetised the situation of households and companies, leading, contrary to initial estimates, to the lowest levels of the last 14 years. According to the latest data from the Bank of Spain, at the end of July, the country’s financial sector NPL ratio stood at 3.85%.

But now, with the rise in interest rates with the aim of curbing inflation, the situation looks set to turn around. The ECB could raise rates to 2.5%, as predicted by the governor of the Bank of Spain, Pablo Hernández de Cos. Despite this hike, inflation in the euro area, which is targeted to reach 2% in the medium term, will remain high over the next two years. The ECB’s forecast is for it to moderate to 7% in 2023, compared with almost 10% at present. As a result of this rate hike, the European body also expects a recession next year.

Far from the last crisis

The arrival of a crisis could complicate employment, the already strained situation of families and companies and lead to more credit defaults. However, no one has yet given a forecast of how high the default rate could rise, although all bankers point out that it will be far from the last great crisis, when the default ratio exceeded 13% in the year 2023, and that it will be manageable.

For the time being, banks have kept down the toxic assets (foreclosed plus doubtful) on their balance sheet thanks to the sale of portfolios, which in the first half of 2022 alone amounted to 14,000 million. In view of the forecasts, banks will have to start increasing provisions to protect themselves from defaults, as requested by regulators. Moreover, the ECB has already asked the European sector for an estimate of the provisions needed in the case of the worst macroeconomic scenario, which assumes that Russia cuts off all gas supplies to Europe. However, the European supervisor is already working with a central macroeconomic scenario based on Russia’s gas supply to Europe being only 20%.

Construction stagnates arrears

Construction stagnates the reduction in NPL that it has been leading since the last great crisis, after reaching maximum thresholds with the bursting of the real estate bubble. The sector closed June with a rate of 8.4%, the same level as three months earlier, breaking the rate of decline. In the case of defaults only in credit institutions, the ratio stood at 8.4%, slightly higher than the 8.3% in March. For their part, consumer finance companies increased their default ratio to 6.28% in June, compared with 6.22% a month earlier.

Original Story: El Economista | Eva Díaz
Photo: Banco de Espana
Edition and translation: Prime Yield