Sat. Dec 7th, 2019

Hernández de Cos asks the banks "prudence" in the granting of loans

Although Spanish entities enjoy better position against european, the governor of Bank of Spain, Pablo Hernandez de Cos, has demanded this Tuesday from financial institutions “prudence" in the credit grant both companies and families. This context "of lower interest rates for a longer period of time can generate greater incentives for risk taking by economic agents," he said. That is to say, Cos does not want mortgage bubbles to be repeated again or for companies to borrow beyond their means.

In his opinion, “Spanish banks are not raising their risk profile significantly, although there are some factors that require a close vigilance" To which he added: "Prudence in the granting of credit must be maintained as a key element to increase the ability of entities to absorb negative aggregate disturbances in GDP or interest rates and ensure financial stability."

Macro context

Challenge to improve profitability

The number one of the Bank of Spain has taken advantage of its intervention, in the XV Meeting of the Banking Sector of the Iese, to review the current situation of banking in Spain, as well as the measures approved by the ECB in monetary policy. In addition to the challenge of low interest rates for a longer time, Cos has ensured that "the macroeconomic context" will be another challenge to recover "the profitability of deposit institutions."

Cos has insisted that “the profitability of the European banking sector It has remained very low and below the cost of capital. ” He has assured that the profitability of banks in the United States was 11%, compared to 6% of those in Europe in 2018. “Spanish entities are no exception to this European pattern, although their consolidated profitability remains above of the European average ”. He recalled that the profitability of the Spanish banking system reached a negative record of -21% in terms of own resources and -1.2% in terms of assets in 2012. During recent years, that profitability has been recovering by decreasing the number of delinquents and improving the quality of the loan portfolio.

The president of the European Central Bank (ECB), Christine Lagarde

The president of the European Central Bank (ECB), Christine Lagarde
(Stephanie Lecocq / Efe)

In the first three quarters of 2019, Spanish banks have reduced the net attributable result by 18%, while operating expenses have increased by 4%. Operating margin fell 1.1%, impairment losses increased 10.6%, interest margin increased 3% and net fees grew 2.5%. The profitability of Spanish entities stood at 6.2% in that period. "This figure is lower than that offered by the current estimates of the cost of capital, which would be above 7%," he said. The manager recalled, however, "that there is a high dispersion in the levels of profitability among entities."

Unproductive assets

About 40,000 million until June

Cos blames the low profitability in Spain compared to the pre-crisis period to "narrowing the interest margin in terms of unit interest or interest margin". This situation has occurred, among other reasons, –he has assured– “due to the increase in the relative weight of unproductive assets that do not generate interest, such as delinquent loans or foreclosed assets”. "The foreclosed assets have been reduced by 50% from the maximum reached in 2011, but they still amounted to around 40,000 million euros in June 2019," he said.

Cos admits that interest rate reduction It has also contributed to “compress the unit interest margin”. Hence, some banks have redirected their portfolios to operations such as consumer credit "in exchange for accepting a higher risk profile."

The Governor has reviewed all the risks that banks have at the moment: operational, legal, reputational, technological and those associated with climate change. Hence, once again he has urged that “new consolidation processes” will arrive and has advocated “internationalization” of financial institutions.

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