Spain’s major banks have built up a shield of 50 billion to protect themselves against possible future insolvencies. At the end of September, the five entities listed on the Ibex 35 (Santander, BBVA, CaixaBank, Sabadell and Bankinter) had €49.402 billion in provisions to cover future defaults, which is €1 billion more than at the beginning of the year.

This is also the largest buffer in recent years, even higher than in 2020 (€47.721 billion), the year in which banks made extraordinary billion-dollar provisions in the face of the impact of the Covid-19 pandemic. In fact, although banks have not yet experienced an upturn in defaults (default figures are at their lowest since 2008), they are covered by these provisions made during the pandemic, the bulk of which they have not released, as a precaution.

Even at the onset of the health crisis, banks had high levels of solvency that allowed them to finance families and companies and to apply relief measures to help with repayments. Now, not only are they better capitalised, but they are also more prudent in building up funds to cover possible future losses due to defaults. If in 2019, the year before the pandemic, coverage ratios for bad loans hovered between 50% and 60%, at the end of September this year it was between 60% and 80%. In any case, the sector expects defaults to begin to emerge in the coming quarters and has prepared itself for when the time comes.

Santander has an insolvency fund of €24.813 billion, while stage 3 loans (considered as doubtful) amount to €36 billion. The bank has a coverage ratio of 70%. BBVA is the most risk-averse bank and has provisions to cover practically all doubtful loans. At the end of September it recorded a doubtful balance of €15.162 billion and a fund of €12.570 billion to cover these potential insolvencies. The coverage ratio is 83%, the highest among the main banks.

CaixaBank’s shield against defaults amounts to €7.867 billion. The Catalan entity has a volume of €11.643 billion in doubtful loans, which means that its coverage ratio is 68% (in 2019 it was 55%).

For its part, Sabadell has set aside €3.038 billion to cover possible insolvencies. The bank has a conservative risk policy. It has a strong mortgage business in the United Kingdom through its subsidiary TSB, where loans are well protected and do not run as much risk of default. Sabadell has also been one of the most active banks in the sale of non-performing loans in recent months to clean up its balance sheet.

Bankinter, which has a business model oriented towards medium and high incomes, has traditionally recorded very low levels of non-performing loans. Even so, the bank has €1.114 billion in provisions to cover doubtful loans, which at the end of September amounted to €1.712 billion.

Supervisors call for prudence

Although for the moment non-performing loans (NPL) have not rebounded in Spain, both the Bank of Spain and the European Central Bank (ECB) have been calling for prudence and are monitoring a possible rise NPL in the face of the crisis of high prices and the continuous rises in interest rates to try to curb inflation. “Banks will now start to reassess the need for higher provisions in their portfolios,” said the chairman of the ECB’s supervisory board, Andrea Enria, a few weeks ago in an interview published by the supervisor itself.

For the time being, the situation is under control. During the pandemic, Spanish households accumulated a lot of liquidity, but with inflation running rampant and the cost of money rising due to interest rate hikes, the sector is worried about the rate at which these funds will be burned. To avoid problems, institutions are already looking for measures to mitigate the effects of monetary policy.

In Spain, the two main employers’ associations (AEB and CECA) are negotiating with the Executive to include in the Code of Good Practices measures to help vulnerable families with difficulties in coping with the increase in their mortgage repayments. Similarly, the European Banking Authority (EBA) is monitoring the increase in delinquency. The body wants to avoid at all costs an over-indebtedness of households and that, faced with the credit crunch, families turn to unsupervised financing.

Original Story: Cinco Dias |Newsroom
Photo: BBVA website
Translation and edition: Prime Yield