May 10, 2021

The Bank of Spain calls on the banks for a new “important effort” of provisions to face the crisis


Spanish banks closed last year in losses, mainly due to the significant amount of provisions they had to make to face the possible impact of the pandemic on their balance sheet. This is money that entities set aside with the forecast of problems such as an increase in bad debts. Now, the Bank of Spain has warned them that this reserve of funds did not end in 2020 and that it has to be extended during this year, which means that once again the profitability of their business will be affected.

Mortgage delinquencies are concentrated in loans that financed more than 80% of the value of the home

Mortgage delinquencies are concentrated in loans that financed more than 80% of the value of the home

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This has been expressed by Mercedes Olano, general director of supervision of the organization, who has remarked that the banks “will have to continue constituting provisions.” “They will have to continue with an important effort”, has influenced the presentation of the 2020 Supervision Report of the Bank of Spain, published this Thursday. “Profitability will be impacted by additional provisions,” he predicted. Olano has justified this observation in that there is still a high level of “uncertainty” about how the crisis will impact and until when in the Spanish banking sector. “Right now we are not able to say how far it will go,” he said, pointing out that it will depend, among other matters, on the rate of vaccination or the operation of the economic measures approved by the Government.

In this way, the Bank of Spain still expresses its caution with the evolution of the banking sector, despite the fact that this crisis began with a healthier starting situation than in 2008 and that it has not yet noticed a motivated deterioration in the quality of its assets for the pandemic. Olano has defended that this time “banking has been part of the solution and not the problem”, by serving as a channel for the transmission of some public policies, such as ICO loans.

The report published this Thursday is an analysis of the work that both the Bank of Spain and the European Central Bank have carried out on banking supervision during the year of the crisis, but includes some observations on the evolution of the financial system in the fiscal year. 2020. He remarks, among other things, that banks have managed to continue with an improvement in their solvency, have improved liquidity that was a concern at the beginning of the health crisis and have continued to reduce the weight on their balance sheet of problematic assets and doubtful collection.

Of course, the Bank of Spain underlines in many of these matters that the situation has improved, in part, due to the impact of the economic measures that both the Government and the ECB have implemented to face the crisis caused by the coronavirus. In fact, it considers that the positive evolution of some of these factors will end up truncating in the coming months, as in the case of non-performing loans. “It is foreseeable that in the near future the negative effects derived from the COVID-19 crisis will materialize in the bank balance sheets,” the agency points out in its report.

In addition, the Bank of Spain has verified in its supervision of banks during the past year that some of the problems that the sector has dragged on for years have been aggravated during the pandemic. The main one is profitability, which “has fallen significantly”, also due to the aforementioned provisions that it will have to continue making this year. The Bank of Spain considers that the low margins caused by the negative interest rates that the pandemic has forced to maintain or the fall in activity that has caused the financial crisis have joined the problems it already had. For this reason, Olano has emphasized the need to advance in the use of new technology and, of course, in cost adjustments. At this point, it has advanced that as the products become more digital, “the offices will continue to lose prominence.”

Once again, the Bank of Spain places the role of the consolidation of the system in this context. That is, the mergers. As long as, Olano recalled, that they meet synergy targets that allow cost reduction. There are two mergers that are being completed in these months (CaixaBank-Bankia and Unicaja-Liberbank), with which the number of significant entities in Spain will be reduced to 10. Despite this, Olano has defended that “there is no risk of oligopoly “in Spain and that it is found that there is still competitive pressure. It has avoided assessing whether new operations will arrive and whether they will affect larger ones or medium-sized entities.

The document also details the “priorities” that both the Bank of Spain and the ECB will have in terms of supervision during this year. It encompasses four issues: how the pandemic will affect the potential increase in doubtful assets and non-performing loans; price correction in financial markets; cybercrime and geopolitical uncertainties. The most relevant is the first, since banks are facing stress tests these months, known as stress tests, carried out by the EBA and which had to be postponed last year due to the pandemic. It will measure the subsistence capacity of entities in the face of a prolonged crisis.

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