MADRID, 4 Oct. (EUROPA PRESS) –
The Governor of the Bank of Spain, Pablo Hernández de Cos, stated this Tuesday that the banks “will have to increase their provisions in order to cover the potential losses” derived from the current risks.
During the inauguration of the 5th Banking Forum organized by the newspaper ‘El Economista’, Hernández de Cos reviewed the financial situation in Spain and pointed out some of the risks, derived from high inflation and increases in interest rates .
However, the current context of the banking sector “starts from a relatively favorable situation”, with a fall of 12.4% in the second quarter of doubtful credit of the resident private sector, placing the doubtful rate of bank loans at 3 .8% in the month of June, “returning to record lows after the global financial crisis.”
Loans under special surveillance “have also intensified their rate of correction”, falling by almost 10% year-on-year in June, and currently representing 7% of the loan portfolio to the resident private sector, although it remains above the records prepandemic. “Logically, it is in the sectors most affected by the pandemic and by the rise in energy costs that the greatest vulnerabilities are concentrated,” the governor deepened.
As for the profitability of the Spanish banking sector, it continued to improve in the first half of the year, once the extraordinary results derived from the mergers in 2021 are discounted.
The return on capital (ROE) stood at 10% in the first half, two percentage points higher than in June 2019, while the common equity tier 1 (CET1) ratio of the group of entities stood at 12.9% in June, 50 basis points below its level in the same month of the previous year, but 70 points above the pre-pandemic level (12.2%).
Hernández de Cos has pointed out that this level of solvency implies the existence of voluntary capital buffers above the significant regulatory requirements, “although lower than those of the rest of the main European countries”.
However, he indicated during his speech that estimating the impact of the current context on the profitability and solvency of banking “is more complex”. “On the one hand, the increase in interest rates will mean that new loan operations will generate higher yields, as will existing loans granted at variable rates. Thus, although the volume of credit will presumably moderate in the current situation, gross revenues are expected to increase, particularly in the short term,” he explained.
On the other hand, the governor of the Bank of Spain has pointed to the increase in financing costs, both for debt instruments issued by entities in the financial markets and for deposits, although the latter factor would affect it to a lesser extent. “It is to be expected that the volume of deposits will be driven upwards, by increasing their remuneration and due to the uncertain environment”, he specified.
On the other hand, the increase in interest rates would also translate “immediately” into a downward revision of the valuations of public and private fixed-income securities that entities have on their balance sheets, although the translation accounting for these lower valuations would only occur if the assets are available for sale, but not if the entities keep them on their balance sheets until the securities mature.
If this were to happen, the banks would obtain lower returns than those offered by the new issues that are put into circulation. “In Spanish entities, less than half of these debt holdings were classified as available for sale at the end of 2021,” the governor explained.
“And, in a somewhat longer horizon, which may last one or two years, is when a good part of the negative effects on the ability of households and companies to meet their financial obligations in the current and expected context would manifest themselves”, Hernández de Cos has affirmed.
Thus, as a result of this situation, he estimates that entities “will have to increase their provisions in order to cover potential losses.” “Additionally, inflation could also raise banks’ operating costs,” he added.
The net impact of all these risks for entities over a three-year horizon “could be negative in certain scenarios”, which is why it has insisted on banks to “exercise caution” and to monitor “thoroughly” the risks, since they can experience an adverse evolution “rapidly” and force “propose new scenarios of tension”.
“All of this leads us to recommend that entities be very careful with their provisioning policy and with their capital planning in the coming quarters,” stressed the Governor of the Bank of Spain.
Hernández de Cos has also referred to the situation of non-financial companies and households. Thus, he has pointed out that a “greater dynamism” of business credit would be taking place in recent months, an evolution that would respond both to the coverage of companies’ financing needs and to a precautionary reason, since it would also be accelerating the growth of their bank deposits. In addition, the effect of the increases in interest rates would already be noticeable in the new financing for companies.
As for households, credit has remained at a stable level in recent months. However, the Bank of Spain appreciates a differential behavior between mortgage loans, which are growing steadily at a rate slightly above 1%, and consumer credit, which is falling at rates of around 4%. In addition, unlike companies, families would not be accelerating the growth of their bank deposits in 2022, but they have maintained a sustained growth of this product since 2021, above 5%.
On the other hand, Hernández de Cos has referred to the “significant” increase in public debt over GDP, following the fiscal policies put in place by the Government to mitigate the effect of the Covid-19 pandemic, although he has indicated that the debt “was already at high levels before the pandemic”.
“It is clear that this high level of public debt, together with the also high structural public deficit, represent factors of vulnerability in the face of a tightening of financing conditions such as the one currently occurring and reduces the room for maneuver of fiscal policy in the face of future disturbances,” said the governor.
On the other hand, he highlighted the reduction, “greater than initially planned”, in the public deficit this year and the significant lengthening of the average maturity of public debt in Spain, which exceeds eight years and delays the impact of the increases of interest rates on the financial burden of the public debt.
“In any case, the annual financing needs of the Spanish public sector are at high levels, around 20 points of GDP,” said the governor, who has asked to adopt a medium-term budget strategy that includes the ” immediate definition” of a multi-year fiscal consolidation plan for its execution, once the economic effects of the pandemic and the war in Ukraine have been overcome.
