Spain – NPLs Explode to New Record High

Spain – NPLs Explode to New Record High

Courtesy of Pater Tenebrarum, Acting Man

A Reminder that the Crisis is Still Going Strong

Those analysts worth listening to are watching the 'clean-up' of Spain's banking system via the new 'bad bank' Sareb with increasing bewilderment  –  the very strong suspicion is that the prices for the toxic crap that is being shifted into the bad bank are still not quite what the market would pay for such assets. This is in spite of the heroic announcements by the Bank of Spain about 'realistic valuations' a while back, and the reason for the suspicion is the lack of foreign participation, and indeed also the curious reluctance on the part of BBVA to jump into the fray. Among the analysts worth listening to in this context is Exane's inimitable Santiago López Díaz, a.k.a. 'Santi', who has so far been depressingly correct about Spain's banks and whom we have to thank for the above deliberations.

These by the way represent a correction of our previous impressions to the contrary, which were mainly fueled by news that Santander was prepared to invest in Sareb. As Santi has made clear, BBVA is so to speak the 'smart money' in the Spanish banking system, which is proven by the fact that it successfully managed to avoid getting stuck in the black hole that goes by the name of Bankia.

Now we get news that Spain's NPLs continue to explode into the blue yonder. Mind, this is hardly surprising, although the speed with which this train wreck continues to pile up is rather breathtaking. Here is the latest chart of the ongoing disaster – NPLs now amount to 11.23% of all outstanding bank loans, an increase of 52 basis points (or €7.4 billion) in a single month (!).

Spain's NPLs hit yet another record high – click for better resolution.

Bloomberg reports:

Bad loans as a proportion of total lending at Spanish banks climbed to a record 11.23 percent in October as the country’s economic slump led more companies and homeowners to miss credit payments.

The proportion rose from 10.71 percent in September as 7.4 billion euros ($9.8 billion) of loans soured in the month to take the total of doubtful credit in the banking system to 189.6 billion euros, the Bank of Spain said on its website today. The mortgage default rate jumped to 3.49 percent in the third quarter from 3.16 percent in the second quarter, the Bank of Spain said.

Spain’s economic slump, now in its fifth year, continues to drive defaults to record highs as lenders report rising impairments of corporate, home and consumer loans as well as those linked to real estate. Doubts about the ability of Spain’s weaker lenders to withstand mounting impairments of loans linked to real estate helped push the country to seek a European bailout for its banking system in June.

“It’s clear that these levels of bad loans are going to keep rising,” said Juan Pablo Lopez, an analyst at Espirito Santo Investment Bank. “The flows of entries into default are still very high.”

The default rate on loans to companies jumped to 16.56 percent in the third quarter from 14.9 percent in the second quarter, the Bank of Spain said. Defaults on loans for real estate-linked activities surged to 30.33 percent from 27.39 percent. (emphasis added)

Good grief! Does anyone still remember when it was argued that mortgage defaults would not increase because it was 'against the cultural inclination' or against the 'mentality' of Spaniards  to skip mortgage payments? (we don't recall the verbatim quote, but it was the CEO of Santander who uttered it).

In reality the motive is that mortgage loans are full recourse in Spain. Both borrowers and lenders have great interest in extending and pretending for as long as is possible, the former because they don't want to become asset-less no future debt slaves in perpetuity, and the latter because they rightly fear the political backlash if they were to get too tough on residential borrowers and moreover don't want to have even more REOs on their books.

In any case, we think this is an area in which a lot of additional bad loan growth remains likely regardless – simply because of the extremely harsh economic realities (which for many employees include not getting paid even if they do have a job).

2013 will be an interesting year: we believe that several euro area nations are likely to once again miss their deficit targets (quite possibly by considerable margins). The markets remain sanguine for now, but that can change again in a heartbeat.

Chart by: Scott Barber / Reuters

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