Spanish banks 'face asset quality slump’ in 2021 - Banking, Regulation & Risk -
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Government support has mitigated credit risks this year but impact of Covid-19 second wave likely to ramp up pressure on lenders, says DBRS Morningstar.

Leading Spanish banks reported a slight recovery in third quarter domestic earnings compared to the second quarter as net fees and interest income rose, boosted by larger loan and fixed income books.

However, new restrictions that have been imposed in Spain to fight the second wave of Covid-19 are likely to increase loan loss provisions in the next few quarters putting pressure on Spanish lenders’ domestic profitability, according to DBRS Morningstar.

DBRS Morningstar posted an earnings commentary on Spain’s seven largest banks – Bankia, Bankinter, BBVA, Caixabank, Liberbank, Sabadell and Santander – on November 3. A merger between Bankia and Caixabank is set to complete next year.

Non-performing loans (NPLs) decreased in four out of the seven banks this year but other indicators point to a “material asset quality deterioration” in the next few quarters, wrote analysts Pablo Manzano and Arnaud Journois.

These indicators include the ECB ́s latest bank lending survey; Spanish Banks have been tightening access to credit during the third quarter and expect to continue doing so for the rest of the year.

The Bank of Spain ́s stress test published on October 29, meanwhile, showed an expected negative impact on capital ratios ranging between 100bps and 200bps for large Spanish banks on its baseline scenario at the end of 2022.

Moreover, statements made by EU officials, including ECB supervisory board chair Andrea Enria suggest that NPLs at European banks could hit higher levels than the last global crisis.

Therefore, the onset of the Covid-19 second wave is likely to cause “significant asset quality deterioration” in Spain’s banking sector in 2021, according to DBRS Morningstar.

Government support

Mr Manzano and Mr Journois wrote that the slow pace of credit quality deterioration reported in the banks' financials this year, despite the huge economic shock of Covid-19, can largely be explained by the extraordinary measures applied by governments and banks to support the economy, including loan moratoria and state guaranteed loans.

In terms of loan moratoria, an average 6.5% of lenders’ total loan books have been subject to some kind of payment holiday, according to DBRS Morningstar.

New restrictions to fight the second wave of Covid-19 are likely to increase loan loss provisions in the next few quarters

The use of ‘stage 2’ loans – loans at risk of turning bad – on the moratoria portfolio remains much higher than on the ‘normal’ portfolio, the analysts wrote, indicating that this perimeter of loans has experienced credit quality deterioration at a significantly higher rate than other parts of the loan book.

Moreover, according to Bank of Spain analysis, the moratoria granted in Spain has targeted borrowers which were already the most vulnerable households, even before the Covid-19 crisis.

In addition, Spanish banks have implemented the state guarantee scheme in Spain and in other geographies. As of September 30, banks have granted around €104bn in lending to SMEs and corporates in Spain linked to the state guarantee scheme. Credit risk has therefore been mitigated significantly by the state guarantees approved by the Spanish government, according to DBRS Morningstar.

This scheme represents around 25% of the sector's exposure to SMEs and corporates in Spain. In addition, the Spanish government has also approved a new state guarantee loan scheme of up to €40bn to provide funding sources to new investment projects.

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