The Bank of Spain warns that delinquencies "will grow" and that the level will depend on how long the war lasts

The Bank of Spain has presented this Thursday its Supervisory Report for the year 2021, focused on the response that the financial sector has given to the pandemic and its impact on its balance sheets. Although the supervisory body recognizes the progress in the situation of Spanish banks, it also recalls that the uncertainty that still remains regarding the impact of the health crisis on their balance sheets is now added to the effect of the war in Ukraine. “Entities must maintain a high level of prudence, with an adequate and early recognition of the associated risks, in order to preserve confidence in the sector and to facilitate the maintenance of the flow of credit to the economy,” says the governor, Pablo Hernández de Cos, in the document.

The head of the supervisor points out that the exposure of Russia and Ukraine in the balance sheet of Spanish banks is scarce, although this does not exempt them from exposing themselves to certain risks derived from this armed conflict. "We must closely monitor the effects of the crisis on entities and their borrowers," says Hernández de Cos in his article in this Report. The focus, he points out, should be placed on those business sectors and population groups for which "the post-pandemic recovery was being slower or delayed and who, in addition, are especially exposed to the economic consequences derived from the invasion of Ukraine."

The agency stresses that “delinquency is going to grow” and warns that it is facing “very large” uncertainty that has not decreased after the pandemic, but rather “has increased”. Remember that there are still 39% of ICO credits that are in a grace period and it is not yet possible to know what the result will be. Added to this is the impact of the war, which "will affect badly" delinquency, although the agency does not give an estimate of the level it can reach. "Our studies say that they can be manageable, but it will depend on how long the war lasts and if they are going to continue raising prices," they point out.

That is why the supervision report published annually by this body places special emphasis on prudence on the part of financial institutions. And this, despite the fact that the analysis of all the factors of the banks such as delinquency, profitability or solvency have had improvements during the last year. Despite this, the Bank of Spain considers that Spanish banking continues to have entrenched problems that it must address. “The banks have to continue being prudent, they cannot raise their hands”, they assure from the organism.

For example, regarding solvency, he points out that despite the improvement, “ratios remain below their European counterparts”. Or in profitability, where the Bank of Spain considers that "the challenge to adapt the structure of entities to the narrow margin of interest and the growing competitive pressure in the sector continues". Finally, regarding delinquency, it underlines that "it is necessary to maintain prudence, since it is possible that in the near future there will be deterioration in the quality of credit assets derived from the deferred materialization in the balance sheets of entities by part of the impact of the COVID-19 crisis.

The Bank of Spain indicates six supervisory priorities for this year. First, control the credit risk management carried out by banks in the face of a possible increase in delinquency. The second point refers to the business model of the banks and their sustainability in the face of narrow margins. The governance of financial institutions will also be monitored. Fourth, the capital strength of the banks will be controlled, especially in those that have it more concentrated in a business or with adjusted own resources. The fifth priority refers to technological innovation. Finally, the risks derived from climate change and environmental deterioration.

Regarding the point of governance, the Bank of Spain makes a veiled reference to the Unicaja case, although without citing it directly. The Bank of Spain asks that one of the challenges of the sector is to give customers confidence and, for this, there must be a "solid" management of the entities. Thus, he points out that the role of independent directors on the bank's board of directors is "fundamental". Precisely in Unicaja the concern in the supervisors was caused by a chained resignation of three of the six independent directors and the reduction in the number of these representatives on the board of directors.

Another of the aspects on which the Bank of Spain focuses is on the increase in commissions. "The concept of free banking services is disappearing," they point out from the agency. The supervisor is concerned that this increase in commissions charged to clients is done with "transparency". And, without mentioning specific cases, they point out that they must be for "services provided and not for fictitious services."