The Bank of Spain released the February data for Spanish banks’ non-performing loans on Monday, and the details aren’t pretty.
Like much else in the wreckage of Spain’s pre-recession property boom, the performance of these banks’ loan portfolios is less than reassuring, Execution Noble’s Joe Dickerson notes:
Credit quality continued to deteriorate in February, with non-performing loans totaling 5.39%, compared with 5.30% at January 2010 (over the past 30 years, the NPL rate has increased 2bps on average in the month of February). Year on year, such loans are up 25%. It is worth noting that in Feb 2009 there was a 139 basis point gap between the NPL rate of the savings banks and the commercial banks; today this gap is 14 basis points.
As Reuters reported, Spanish financial institutions’ non-performing loan rate reached a 14-year high in February. But can the NPL rate get grimmer?
On that point, the convergence of commercial banks with the highly troubled cajas de ahorros is of interest, and Execution Noble’s March note on Spanish banks is worth a revisit. (Full version in the Long Room)
As the note, which focussed on the effects of NPLs in tandem with tightened credit across the sector, argued at the time:
Our analysis suggests that the Spanish lending market will contract at a rate somewhere between 5% pa and 15% pa over the course of 2010-2013…
In terms of credit quality, Spanish loan loss charges are set to rise materially as the real estate market continues to deteriorate, the well-known stresses in the developer sector continue, and commercial real estate worsens in typical late-cycle fashion. Material impairment to household debt servicing capacity is anticipated as unemployment rises, the social-safety net wears off, and the forbearance kimono is opened. Debt servicing capacity will be further attenuated because, without the ability to print, wage deflation seems likely in the context of economic austerity.
The bottom line is that we expect NPLs to peak in 2011.
In contrast, the Bank of Spain’s Financial Stability Report has emphasised that the rate at which NPLs have accumulated has nevertheless begun to slow, despite the high numbers that are sloshing around the system.
And yes, Execution Noble did indeed use the phrase ‘forbearance kimono’. The securities group’s research has stressed the long-term disruptive role forbearance could play in Spanish lending. So it’s worth once more returning to the March note on this point too, in light of Monday’s data:
As in other economies, Spain is playing the forbearance game and the situation exhibits Japanese-style patterns. Consumers, banks and regulators are, generally speaking, playing it long and waiting for the pain to pass in the hope that the economy, and real estate specifically, will eventually recover with the passage of time.
We’ve noted before that Spain’s fiscal deficit reduction plan assumes a prompt return to growth, a somewhat optimistic view, according to analysts. For instance, a recent SocGen note has also questioned whether the worst of the Spanish real estate unwind is over yet:
Despite an over-built and overleveraged real estate market, Spanish house prices have fallen by “only” 10%, the smallest decline among similar peers. The correction is likely to be drawn out and severe in magnitude. Dividing Spain into the Good and the Bad — where the Good Spain has an LTV of 54% and the Bad 83% – we see a potential mark-to-market loss of €140bn for the sector. This is more severe than the €72bn worst case losses estimated by S&P in September 2009 and is enough to wipe out all the provision allowance and 40% of equity in the system. True the banks do not need to mark to market loan assets, but not doing so would still imply years of little or zero profits in the sector.
More of that in the usual place.
We do wonder where all this macro doubt could leave NPL rates in the future, even as Spanish loan restructuring continues. Something to watch.
Related links:
Bank of Spain denies Spanish banks are delaying losses by acquiring NPAs – Risk
Mind the debt funding gap, banks – FT Alphaville
BBVA, an exercise in Spanish banking losses – FT Alphaville