The non-performing pain in Spain is back in the limelight.
The total stock of non-performing loans sloshing around the Spanish banking system hit €100bn in May, according to data from the Bank of Spain released on Monday.
Then again, broader trends in loan growth are also of interest as the pain in Spain turns toward deleveraging of debt. In particular, loans related to Spain’s real estate crash.
As Santiago López Díaz of Credit Suisse noted from May’s data (emphasis ours):
The most important points, in our view, however, have to do with: a) the decline in non mortgage lending, which is already falling at a -5.5% YoY rate and is the main factor responsible for the overall decline in the Spanish financial system and b) the surprising stabilisation in the YoY rate of growth in mortgage lending (up 0.8% YoY) something, that, in our opinion, is not consistent with the current market environment (high unemployment, 44% and 90% declines from their peaks in home sales and building permits, respectively, bankruptcy of major real estate developers), even considering the marginal recovery in sales during the past months. The stabilisation raises questions, in our view, about potential restructurings in the sector (both to individuals and companies).
This does indeed stick out a bit as Spanish banks (and borrowers) generally embark on some overdue deleveraging. As López Díaz continues, real estate exposure is still high (emphasis ours):
It is remarkable to see that even though total lending to real estate developers has turned negative at the end of March 2010 (last available data) the contraction is quite limited given the correction in the real estate sector. In fact, up until the end of 2009 the exposure to developers had not declined in spite of the bankruptcy of several companies involved in the sector. Banks are gradually reducing their exposure to the segment (-3.4% YoY) while Cajas continue to increase (+1.1% YoY) according to our estimates base of information released by Bank of Spain.
However, cajas have been reporting improvements in their NPL ratios even as banks report deteriorations. In particular, note how pliable the statistics look around certain periods:
There’s also an extra dimension here — loans which were non-performing but have since been restructured, a process which Credit Suisse reckon understates the NPL stock by around a third, in addition to dampening reported NPL growth. That could take overall stock to €150bn. Although we’re guessing that a lot depends on the way the caja sector will be restructured overall.
Finally, it’s worth comparing all this bad news on loan losses with Spanish banking’s famed dynamic provisioning regime. As we’ve noted, the buffers built up via this process work well, but depend on models that can quickly be superseded by actual losses. For their part, Credit Suisse reckon that total existing provisions in banks and cajas could cover up to a 16 per cent loss from exposure to real estate developers.
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Stressed sand-castles
But where does this mess fit into the European bank stress tests?
Well, Credit Suisse aren’t that bothered about what the results will say about haircuts on Spanish banks’ holdings of domestic sovereign debt.
That’s on the theory that if the Kingdom of Spain was ever brought close to default, it’d probably go the whole hog rather than the 3 per cent haircut that the tests seem to have in mind. And, well — there’s historical precedent for that view.
Instead, they’d rather see some gore in markdowns on real estate loans:
This is the area, in our view, that would be more deeply analysed by the markets. We don’t know yet what assumptions have been used by Bank of Spain. There are several types of real estate assets but the potential mark downs for certain types of assets, in a stress scenario, could surpass 50% (or even significantly more than that) in certain areas of the country.
Fitch already obliged with some own-brand stressing. With bad results for the cajas.
So by this point, we’re just dying to know what CEBS will bring for Spanish banking in Friday’s stress-test results. Although, if Spanish banks themselves are also fervently waiting for the loan growth of the past to return — best not to bother.
Related links:
Did Good Cajas Extend Bad Loans? (PDF) – Fedea
Spain’s big chance – FT Alphaville
Spain’s sand-castle exposure – FT Alphaville