The beginning of a new year is a good time to review matters that once held a prominent place among the concerns of the previous year, as was the case with the evolution of non-performing loans in bank credit.
The start of 2023 did not seem to bode well in this regard, given the foreseeable evolution of the main variables affecting the ability of households and businesses to meet their payment obligations. The Euribor, which remains the main reference index for determining loan interest rates, had climbed throughout 2022 from negative values to 3%, and forecasts indicated it would continue to rise, as indeed occurred, in line with successive increases in the European Central Bank’s intervention rates. Inflation in February reached 6% annually in Spain and 8.5% in the eurozone. GDP growth was forecast at only slightly above 1% for the year as a whole, and the unemployment rate was expected to approach 13%. All this against the backdrop of the war in Ukraine and uncertainty about energy price developments.
Fortunately, the worst predictions did not materialize and the performance of the Spanish economy during 2023 has been better than expected. The same has occurred with the repeated announcement of an imminent increase in non-performing loans which, at least for the moment, will have to continue awaiting confirmation.
The aggregate volume of loans classified as non-performing by Spanish deposit institutions has continued to decline throughout 2023, as it has been doing for the past 10 years, and as of September 30 amounted to €38,955 million, 3.3% lower than that recorded at the end of 2022. The non-performing loan ratio for credit to other resident sectors stood at a minimum of 3.44%, despite the continued deleveraging of households and non-financial corporations, which has reduced the outstanding credit balance (the denominator of the non-performing loan ratio) by 3% annually.
Several factors have contributed to this favorable development in non-performing loans. Spanish companies have improved their competitiveness in the domestic market—partly due to a cost structure less dependent on energy prices than their European competitors—have increased their exports abroad, have not seen their access to credit constrained, and the increase in demand has allowed them to absorb higher financial and labor costs reasonably well and maintain profit margins.
The non-performing loan ratio for bank financing of productive activities stood at 4.1% of outstanding credit at the end of the third quarter. Unlike what occurred in the 2008 crisis, real estate activity is not among the sectors with the highest non-performing loan ratios, and only certain sectors particularly affected by the pandemic, such as hospitality, with a limited weight in banks’ credit portfolios, show a somewhat higher ratio, but clearly declining.
In the case of households, the significant increase in disposable income, employment growth, and accumulated savings have contributed to keeping bank credit non-performing loans stable, with a ratio of around 2.8% for the year as a whole, even lower, 2.3%, for mortgage loans for home purchases. The containment of non-performing loans has been supported by measures adopted under the mortgage Codes of Good Practice (CBP) signed by Spanish institutions to assist vulnerable households or those at risk of vulnerability, as well as renegotiations agreed with their clients to facilitate compliance with their financial obligations.
Unlike the year just ended, expectations for what might occur in 2024 invite a certain optimism. Economic forecasts anticipate declining inflation throughout the year, with interest rates that would have already reached their peak and, although slowly, will gradually decrease. Positive employment trends, moderate wage increases, and the recovery of real incomes are expected to boost domestic demand, to which would be added the anticipated reactivation of the European economy, increased productive investment, and the impetus provided by projects linked to the NGEU program, while remaining mindful of the high uncertainty arising from geopolitical tensions.
In this scenario, the expected trend is for moderation in the non-performing loan ratio at Spanish banks, with neither sharp increases anticipated, unless a significant unforeseen event occurs, nor a pronounced decline, among other reasons due to credit containment itself.
Spanish banks have done their homework: they have cleaned up their balance sheets, increased their provisions, signed codes of good practice to support businesses and households in difficulty, and renegotiated with their clients when needed. Let us hope that the pessimists are also wrong in 2024 but, if they are not, having a robust, solvent, and prepared banking system is the best defense to ensure that non-performing loans do not hinder economic growth or threaten financial stability.
Santiago Pernías Solera, AEB Advisor
