Spanish banks need to step up efforts to cut their stocks of problem loans in order to boost profits and give the economy a shot in the arm, according to the country's central bank.
Spain's lenders were left holding tens of billions of euros' worth of problem loans following the collapse of the country's property sector in the wake of the global financial crisis and are still suffering the consequences.
In its annual report, the Bank of Spain said banks had made progress in reducing nonperforming loans since the end of the crisis, with a 31% fall in new bad loans between 2014 and 2017. But it said the sector's NPL ratio was declining at a "relatively moderate pace" and urged banks to address the issue "promptly."
"The decrease in NPLs is somewhat slower in the last few quarters and, at the rate of fall of the last three years, NPLs would still exceed €50 billion at the end of 2020, a figure which is still significant," the report said.
The NPL ratio stood at 7.9% at the end of 2017, according to Bank of Spain figures, down from a peak of 13.8% at the end of 2013, but higher than a forecast made in 2014 of 4.7%. The central bank is now forecasting a NPL ratio of 4.4% by 2020.
Doubtful loans stood at about €100 billion at the end of 2017, half the level in 2013, while foreclosed assets totaled €58 billion, down from almost €80 billion.
Knock-on effects
High levels of bad loans have negative consequences not only for banks themselves, but also for the economy as a whole, as the time banks spend managing them could be spent granting new loans, the central bank said.
NPLs also raise banks' cost of funding because of uncertainty regarding the value of the assets, which can lead to a tightening of the credit supply. Banks therefore lend less to households and businesses, which in turn puts a brake on the economy.
The report noted that banks have made progress clearing their balance sheets of toxic real estate debt, but the NPL ratio for loans to construction and real estate development firms was nearly 20% at the end of 2017.
The Spanish banking sector has undergone a major restructuring, with the number of banks falling to 65 in 2017 from 122 at the beginning of the crisis. The five largest banks held 70% of total assets in 2017, up from 49% at the start of the crisis. Spain's largest banks include Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, CaixaBank SA, Bankia SA and Banco de Sabadell SA.
Lackluster profits
The report said that the over-indebtedness of the private sector during the crisis had a notable impact on the profitability of Spanish banks, and that profits are still stuck below precrisis levels.
"Their return on equity remains low in historical terms and the stock market prices of Spanish ... banks continue to reflect investors' uncertain expectations as to the future bank performance," it said.
Lenders should not count on a return to precrisis levels of credit expansion, so they need to find new streams of revenues and control their expenses, according to the report.
In addition, they should not depend on interest rate rises for better profitability. They should be able to achieve efficiency gains through digital banking, as Spain's digital take-up is low and has the capacity to grow significantly given the country's high mobile phone penetration.
