The Bank of Spain asks entities to curb consumer credit and improve their solvency | Economy

The Bank of Spain asks entities to curb consumer credit and improve their solvency | Economy


The Bank of Spain has asked financial institutions to curb consumer credit before a recent increase in delinquency in these loans. And he stressed that, with data up to June 2018, Spanish banks are the worst capitalized in Europe and, therefore, need to strengthen their solvency levels. These are the main conclusions of the Financial Stability Report, a document published this Wednesday that was not so incisive with banks and with the new governor, Pablo Hernández de Cos, has acquired another tone. This way, no one will be able to tell the supervising body that it is not talking about the banks, a common criticism in the middle of the crisis.

As for the decision of the Supreme Court that customers must pay the tax on documented legal acts, the Bank of Spain has explained that any litigation is a "relevant" risk. But in any case the judgment of the high court returns to the previous situation, in which the risk has disappeared. "The laws are applied and the banks have experience adapting, but we must remember that changes in the mortgage market affect millions of people and have economic consequences in prices and quantities, and we must assess whether they are sought or not" , have declared sources of the Financial Stability Department of the Bank of Spain. A comment that can be interpreted as a warning to any ill-considered change in mortgage legislation now that changes are being demanded.

The Bank of Spain asks entities to curb consumer credit and improve their solvency

What the Bank of Spain has talked about in detail is consumer credit. The supervisor stresses that this has skyrocketed by 40% between July 2015 and July 2018, from 44,400 million to 62,800 million. And in the last year the number of defaulters in these loans has increased by 8.6% and 22.6% only in the segment for the acquisition of durable goods. These increases have taken place even "in a context of economic activity and decline in the unemployment rate", explains the Bank of Spain. However, the delinquency ratio has remained practically at the same levels because the credit has gained a lot. That is, the rise in credit is hiding a deterioration of some of them.

Given this scenario, the Bank of Spain expresses itself very clearly: "As a consequence of the evolution of the demand for credit, as well as the search for more profitable business segments, there have been high growths in consumer credit for acquisition of durable goods The very rapid growth of credit tends to carry with it a higher risk, although this afternoon is in. In fact, delinquency levels have increased recently, which will require that entities additionally provide for the increase in delinquency and review the sustainability of their rate of expansion in this business segment and if the criteria for granting the new operations are adjusted to the medium-term risk profile they wish for their credit portfolio. " Or put another way: given the rebound of the doubtful loans, the supervisor asks the banks to stop the concession by tightening the criteria.

The Bank also points out that in Spain it is where consumer credit has grown the most and where higher interest rates are being charged for this, compared to the main European countries. The average rate of these loans is 8% in Spain. However, the supervisor points out that there is already a certain deceleration: in those granted for the acquisition of durable goods by deposit institutions, the growth has gone from 28% in March 2018 to 23% in June 2018. And remember that for now, credit for consumption only accounts for 5.3% of total financing to the private sector in Spain and, consequently, it is a problem of manageable quantities.

The biggest problem is seen in the low capitalization of Spanish financial institutions compared to their European peers. In an eloquent graph that accompanies the supervisor's explanations, Spanish banks have the lowest solvency ratio of all the countries that report to the European Banking Authority. This has only increased by 30 basis points since 2014 and has been due to the decrease in risk-weighted assets, says the Bank of Spain. Or what is the same, for the reduction of credit. "Although the level of the capital ratio is clearly above the regulatory minimums, in the international comparison of solvency, both with the countries of the Banking Union and the rest of the European Union, Spanish entities show reduced levels of their capital ratios This reflects, to a large extent, the process of reorganization of the bank balance sheets carried out and the greater density of its assets, "reads the report on Financial Stability.

And by way of conclusion he adds: "Entities should try to strengthen their capital position, given that solvency is a fundamental element of the ability to absorb losses and a reference indicator for the market when judging the soundness and trust that is deposited in an entity or in a banking system in general. " To this end, the supervisor urges the entities to take advantage of the improvement in profitability that they are achieving, although this is still highly conditioned by low interest rates and the process of deleveraging.

This jug of cold water is added to the stress tests of the European Banking Authority published last Friday. In them, although the Spanish banks do not suffer much capital erosion, they start from low levels and, as a result, they are in the worst place in the table only above the British. Of the 48 examined, the four Spaniards are among the 17 from the bottom. ECB Vice President Luis de Guindos already stated on Monday that the banks that appear in these tests with capital levels below 9% in the adverse scenario should improve their capital position. And that those who are in 9% should reduce their vulnerability. The Sabadell stood at 7.58%; the BBVA at 8.8%; Caixabank at 9.11% and Santander at 9.2%. Entities replicate that they have done operations that improve those ratios.

However, despite their narrow margins, Spanish entities present a profitability above the average of European countries. In the first half of 2018, Spanish banks increased their profits by 12.5%, leaving them above 10 billion euros. The main determinant of this improvement has been the lower losses due to asset deterioration, says the supervisor. Credit to the private sector decreases by 2.9% per year. The ratio of doubtful loans has fallen to 6.4%, 2.1 points less than a year earlier. And problematic assets are down 60% from the highs of 2013, a drop in 114,000 million from the environment of 250,000 that were recorded.

BBVA, indicated by Turkey

The Bank of Spain stresses that there has only been a contagion very contained by the uncertainty in Italy and that the main emerging markets have not been affected by the financial turbulence. However, it does consider that the problems experienced in Turkey may affect BBVA, which owns 49.9% of the second private bank in the country, the Garanti, which represents 14% of the Spanish bank's profit. For the first time, a Financial Stability report mentions a specific entity. The supervisor emphasizes that in the central scenario the impact by Turkey on BBVA's capital ratio would be limited. In addition, it highlights that the loans between the two entities are very limited and that BBVA has applied partial hedges to mitigate the risk of fluctuation of the Turkish lira. Although also remember that the Turkish subsidiary still needs to renew this year wholesale financing: 405 million dollars and 649 million euros.

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