Spanish banks’ asset quality deteriorates

Spanish stock exchangeThe asset quality of Spanish banks has deteriorated further, leaving them badly exposed to another downturn, figures show.

Non-performing loans (NPLs) have “soared” over the past year, showing more deterioration in the third quarter, SNL Financial, a data analysis firm, says.

The findings come after flows to Spanish bond funds recently increased in the wake of rising investor confidence in the eurozone country – one of the worst affected by the financial crisis – and since Spain emerged from recession in the third quarter.

Spain’s largest banks, BBVA and Banco Santander, have reduced general exposure to Spain by spreading risk across countries, meaning they have lower NPL ratios at group level. But the domestic NPL figures from these banks have soared during the last five quarters, a period characterised by the reclassification of restructured or refinanced loans, as well as rising property-related provisions.

Overall, the NPL ratio for six Spanish banks is 12.1%, with BBVA and Santander standing at 6.2% and 6.4%, respectively, as reported by the banks.

Bank asset quality remains a key issue in Spain, SNL says. Not only does it determine the earnings and capital strength of the banks, but an impaired loan book can also cast a long shadow over future economic performance, particularly if lending is contracting. 

“A further downturn could hurt Spain's banks badly,” says SNL.

However, part of the reason for the soaring NPL level is that Spain has acknowledged the situation and is attempting to deal with the problem, particularly as it is under pressure from its European partners and the troika of the European Central Bank, the European Commission and the International Monetary Fund.

SNL quotes Espírito Santo analyst Fernando Pascual saying that he expects banks and the Spanish economy to continue to deleverage, pushing up the NPL ratio.

With Spain joining the ranks of European markets that have emerged from recession, investors committed record-setting amounts of new money to EPFR Global-tracked Europe and Spain equity funds during the third week of October. Year-to-date commitments to Spain bond funds crossed the $4 billion (€2.9 billion) mark.

With a return of 9%, Spain was the third-best developed world stock market performance in October.

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