|
|
|
|
The new financial reform won't manage to slow up the drop in credit
|
|
The new financial reform enlarges the financial safety net for property assets by an additional 50 billion euros...
|
|
In February the Spanish government passed a Royal Decree Law to sort out the financial system. The main aim of this reform is to dispel doubts regarding banks' solvency given the increase in troubled property assets on their balance sheets. To this end, banks are required to increase the financial safety net for their property portfolios estimated approximately at an additional 50 billion euros by the end of the year. This measure has initially been welcomed by analysts. However, there are questions regarding the law's possible effect on the trend in private sector credit.
|
|
|
|
According to the calculations presented by the Minister of the Economy, these additional provisions can be broken down as follows: close to 10 billion euros from the banks' profits will be allocated to cover up to 7% of healthy assets related to property developments. The remaining 40 billion euros will extend the safety net for troubled property assets that totalled 175 billion euros in June 2011. These include foreclosures, doubtful loans and loans at risk of default. Of these 40 billion euros, 15 billion will be charged to equity and capital instruments and the remaining 25 billion to profits.
|
|
|
|
As a consequence of these new requirements, provisions for potential losses related to property assets will increase significantly
|
|
...and will help to dispel doubts in the wholesale financing markets.
|
|
The gradual recovery in confidence will also be boosted by the restructuring to be carried out on Spain's banking sector in 2012. In fact, the financial reform is encouraging mergers between institutions. In this respect, those institutions immersed in mergers will be able to prolong by one year the period in which they have to comply with the provision requirements approved in the Decree Law, as well as write off any asset deterioration against equity. Moreover, the Fund for Orderly Bank Restructuring (FROB) has been enlarged by 6 billion euros to be able to finance these institutions via the acquisition of contingent convertible bonds. In exchange, the merged institutions will have to undertake to increase credit to households and firms.
|
|
Resorting to the ECB is the main source of funding for Spanish banks.
|
|
February already saw wholesale funding markets opening up a little to banks, with more debt being issued by the main financial institutions. However, the large volume of maturities facing Spain's banks in 2012 will keep their net borrowing high. We therefore expect banks to continue looking to the European Central Bank (ECB) as their main source of funding over the next few months. In January 2012, the ECB's net lending to banks reached a new peak of 133 billion euros. This growing trend is more than likely to continue over the next few months, particularly with the additional injection of liquidity by the ECB at the end of February.
|
|
|
|
But in spite of this greater liquidity in the markets, the process of private sector deleveraging and the deterioration in the macroeconomic situation will push credit down in 2012. The latest data available show a 10.9% fall in new credit transactions being granted in the second half of 2011. As a result of this, credit to other resident sectors posted its largest drop since the economic recession began, down 3.3% year-on-year at December 2011. As shown by the private sector financing figures in the table below, this fall was spread evenly between non-financial firms and households. Both sectors reduced their indebtedness by 2.4% year-on-year in 2011. This figure contrasts with the 13.7% rise in public debt in 2011.
|
|
Resident private sector credit falls by 3.3% year-on-year in 2011.
|
|
According to the bank loan survey published by the Bank of Spain, the reasons underlying this drop are due to factors of supply and demand. Both the slightly tougher conditions for granting credit and the weak demand for loans, especially in terms of households, explain the weakness in credit. Looking to the future, the same survey expects further contractions in credit during the first quarter of this year, especially due to the worsening macroeconomic situation. This is in line with our own forecast for the trend in credit for this year as a whole, in which expect credit to decrease at a similar rate to the one recorded last year.
|
|
Doubtful loans pick up again to 7.62% in December 2011.
|
|
Moreover, the expected deterioration in the Spanish economy this year will continue to push up banks' doubtful loan rate. The latest data available show further growth of 9 basis points, reaching 7.62% of all credit. Although a breakdown by production sector is still not available, all the evidence points to a widespread deterioration in rates in the last quarter, particularly in the case of property assets.
|
|
|
|
In short, the new financial reform passed by the government will consolidate Spain's banking sector and help to restore confidence in the wholesale funding markets. However, credit is unlikely to avoid a relapse in 2012. First the excessive debt in Spain's private sector needs to be corrected and the overall economic situation also needs to improve. Two requirements that will not be met this year.
|
A change in trend in household savings?
|
|
|
|
Within this weak context for the Spanish economy, the trend in the household savings rate becomes a key variable to determine the performance of domestic demand. In September 2011, this stood at 12.0% of the gross disposable income of Spanish households, far from the 18.5% reached in 2009. A peak that was due to preventative savings given the poor economic prospects at the time and which intensified the contraction in private consumption.
|
|
Household savings are expected to stagnate in the fourth quarter of 2012.
|
|
With regard to the fourth quarter of 2011, we estimate that the deterioration in Spain's macroeconomic scenario halted the fall in savings recorded over the last few years. This might even increase slightly in 2012 due partly to a possible decrease in the gross disposable income of households.
|
|
Bank liabilities fall by 4.6% in December, driven by term deposits.
|
|
The data on the liabilities of financial institutions at year-end 2011 might shed some light on the performance of the savings rate at the end of last year. Of note is December's 4.6% year-on-year drop in bank liabilities in the hands of households and firms. This is largely due to the performance of term deposits, down by 5.5% in December over the same period. Part of this drop can be explained by savings being moved to public debt products, which saw their yield rise over the last few months of the year. For their part, short-term deposits as a whole (sight and savings), which react most to variations in preventative savings, remained the same at the end of last year. However, this performance contrasts with the falls recorded in the third quarter of 2011, so we may be seeing a change in trend in the household savings rate.
|
