The latest financial stability report from the Bank of Spain warns of a new source of risk for banks: the potential increase in loan defaults in the future by families and small businesses.
According to the banking supervisor, “the economic policy measures implemented during the current crisis have been crucial to maintain the repayment capacity of families and, especially, of non-financial companies and individual entrepreneurs. In this context, the doubtful ratio of credit to the resident private sector stood at 4.2% in December 2021being 0.2 percentage points lower than that registered the previous year”. Doubtful loans are considered as such when they accumulate at least three defaults.
Nevertheless, Loans under special surveillance are growing stronglywhich means that they register a greater probability of non-payment with respect to those in a normal situation and that it is considered the previous step to delinquency.
According to the Bank of Spain, banking drags 94,000 million euros that are at risk of going into default. The figure has grown by 14% year-on-year and, at the end of 2021, its weight over the total loan portfolio reached 8%. This level, which means that 8 out of every 100 euros is at risk of default, is 2.2 points higher than that registered before the pre-pandemic (about 70,000 million euros).
In addition to loans under special surveillance, they are also growing at double-digit year-on-year rates “the operations subject to refinancing or restructuring, which are usually also associated with possible repayment problems by borrowers and that, in fact, more than half of their volume is classified as doubtful”, according to the Bank of Spain report. Specifically, in December last year they increased by 14.3%, compared to 9% decrease observed in December 2020.
However, the financial supervisor explains that this rebound in refinanced credit “was registered exclusively in the non-financial corporations and individual entrepreneurs sector (30.6%), while a moderate decrease was observed in the household sector (-3.4 In aggregate terms, refinancing accounts for 5% of total outstanding credit, the same percentage as before the pandemic.
In this context, he details that “certain signs of deterioration could anticipate an increase in problem assets in the future” and hints that the current situation of energy crisis and a potential rise in interest rates could cause payment problems in households with lower incomes. In addition, persistent inflation will continue to weigh down family income, with the consequent impact on consumption.
About the companies, the stability report states that those with the highest probability of default are those belonging to sectors most exposed to the health crisissuch as hospitality or tourism.
“The sectors most affected by the covid-19 crisis continue to show the greatest signs of deterioration, especially manifest in loans under special surveillance. In the sectors most affected by the pandemic, the weight of doubtful assets over total exposure increased since the beginning of the crisis (from 5% to 5.9%), while in the rest of the sectors there were decreases, but it is in loans under special supervision where the differences are more significant, despite the fact that they grow in all sectors The combined weight of doubtful loans and loans under special supervision in the sectors most affected by the pandemic reached 23.9% in December 2021, compared to respective weights of 17.7% in the moderately affected and 15.5% in the sectors least affected by the covid-19 crisis,” the report states.
Also, remember that many loans have ICO guaranteesso that, in the event of non-payment, the delinquency It would not only affect the banking system, which would have to increase its provisions, but also the State, which has acted as a guarantee ofand financing operations. If such a scenario occurs, doubtfulness would be transferred to both the deficit and the public debt, which broke a record in February by exceeding 1.44 trillion euros.