A decade after the financial crisis upended Spain’s banking system, we look at the asset quality of the country’s top lenders.
In late June, Spain’s central bank released a 238-page annual report outlining the impact Covid-19 could have on the country’s economy.
The Spanish economy suffered its steepest ever loss in the first quarter of the year (-5.2%) and the drop is expected to be even worse in the second quarter.
The Bank of Spain predicts unemployment in the country could rise to 18.4% in a best case scenario but could hit 24.7% if a second wave of the pandemic returns.
“Once the crisis comes to an end, we will find ourselves with the highest level of public debt in decades,” warned Bank of Spain governor Pablo Hernandez de Cos on June 30. “We’ll then have to undergo deep budgetary reform.”
The situation mirrors the fallout from the global financial crisis a decade ago, when the collapse of the housing bubble left Spanish lenders overburdened with non-performing loans and the government had to apply for a €100bn European rescue package to bail out its financial sector.
To assess the level of risk this latest crisis poses to Spain’s banking sector – ahead of an expected surge in bad loans from Covid-19 – it is worth analysing underlying asset quality at Spain’s 10 largest lenders.
Areas of concern
General non-performing loan (NPL) data – between December 31, 2018 and December 31, 2019 – points to an improvement in asset quality at all 10 banks – led by Banco Santander, BBVA, CaixaBank and BFA Tenedora de Acciones – going into the pandemic, according to The Banker Database.
However, the data also points to minor areas of concern at medium-sized institutions, such as Unicaja Banco and Grupo Cooperativo Cajamar.
The year-on-year basis points change in the NPL ratio, for example, and the Allowance for Loan Losses to Gross Total Loans – the provision on loans divided by gross total loans – underline this general improvement in the sector.
The annual average for the Allowance for Loan Losses to Gross Total Loans is -34.29bps and for NPLs it stands at -56.23bps. This year-on-year decline in average provisions set aside for bad debts suggests more secure loans books across the 10 banks.
Only Grupo Cooperativo Cajamar (with an NPL ratio of 6.07%) posted an NPL ratio of more than 5%, but it is important to note that the bank’s NPL ratio improved compared to the previous year (in common with all 10 Spanish banks).
Impairment charges
The trend, however, is slightly different if we look at the Total Impairment Charges to Total Operating Income ratio column (total impairment charges and provisions divided by total operating income, expressed as a %).
Only one bank, Banco de Sabadell, recorded an improvement (+10.64%), in what are essentially write-offs on the loan book, over the previous year.
In the nine other banks, impairment charges have eroded a larger proportion of operating income compared to the previous year which suggests that concerns about corporate balance sheets are on the rise. Critically, these concerns are only likely to increase further because of the Covid-19 crisis.
Uncaja Banco and Grupo Cooperativo Cajamar were the worst performers in this regard, posting high Total Impairment Charges to Total Operating Income ratios of 33.24% and 37.92% respectively.
Spain’s banks are in a different position to 2008, when lax oversight allowed many lenders to rack up unsustainable losses. This time around, non-performing loans are declining and under control and solid levels of provisions to cover losses are in place. But that does not mean that in the event of a protracted and drawn-out downturn that volatility will not return to hit segments of the market.
