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Spanish banks' profitability still low, credit risk on rise, Bank of Spain says

Bank of Spain Governor Pablo Hernández de Cos said one of the main challenges the Spanish banking industry currently faces is restoring profitability, and warned the industry about the rising consumer credit for durable goods.

Even though Spanish banks' profitability is higher than the European average and returned to positive values — having grown 7% as of June 2018 — it is still below pre-crisis levels and is lower than other developed-economy banking systems.

In a speech at the 14th banking industry meeting on Dec. 12, the governor said the drivers of low profitability are unproductive assets and the interest rate, which has squeezed lenders' net interest income.

However, he said low interest rates impacted profitability the least when compared to the other factors.

"The actions to be taken to recover profitability should be based on accommodating the expenses to the new size of the balance sheets, looking for alternative sources of income and improving efficiency," Hernández said.

He highlighted the 15% growth in consumer credit for durable goods so far in 2018 — along with the rate of defaults rising in tandem that he considers warning signs.

"It would not be acceptable for the search for an alternative source of income in the short term to become once again a potential source of future losses," Hernández said.

Hernández said the situation in consumer lending indicates that banks have eased their risk acceptance and selection standards. He said "past experience has shown that loosening credit standards eventually leads to notable increases in default rates," and added that these lessons should not be forgotten.

Price-setting policies are instrumental in ensuring an appropriate risk-adjusted profitability, he said, and these policies must be "consistent, comprehensive and rigorous."