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Banks Accelerate Concession of Loans Before Restrictions by BdP Take Effect
22 May 2018
Successive reductions in spreads have allowed the banks to grant loans to individuals who may not be able to afford them in the event of any hikes to interest rates. Moreover, the economic cycle is moving in that direction.
Since the beginning of the year, the Caixa Geral de Depósitos has twice reduced the margin it charges on loans for its customers, known as its spread, and has accelerated application processing times. Novo Banco also reduced its spread, equalling the lowest margin on the market, while also launching a flat rate campaign, which is unclear and could lead to future delinquencies. These are just a few examples of the race against time that banks in Portugal are undertaking to accelerate the concession of credit to families before the imposition of new recommendations for limits by the Bank of Portugal (BdP).
The central bank’s initial concerns regarding the acceleration in the concession of loans to Portugal’s households were made public by the BdP in early December 2017, as the bank threatened to take any necessary actions. In its Financial Stability Report, the BdP noted that ” the current environment of low-interest rates has joined with other factors, leading to a general easing in lending criteria, increasing the likelihood that borrowers with a lower capacity for repayment will be granted financing. This is particularly the case with projects whose viability may be called into question after a normalisation in interest rates.”
In February of this year, the banking supervisor stated that it saw that there were reasons to put a “brake” on lending, releasing a set of recommendations that would, however, only take effect in July.
The banks, instead of implementing some of the recommendations right away, have been further reducing spreads. That reduction, along with other measures, has opened the door to a greater number of clients accessing financing than would have been the case if the maximum effort rate had already been in place. As it happened after the 2008 crisis, this behaviour, given the likely rise in interest rates, could lead to defaults by families are unable to afford the loans.
Just a few days ago, BdP Governor Carlos Costa implicitly acknowledged the concern with the current situation, stating that if banks do not comply with the recommendations, the central bank’s next step would be to make them compulsory.
Given the current concern about the concession of loans (residential and consumer), Público asked the BdP whether it should implement the measures announced in February sooner. Faced with concerns in December, the central bank imposed a deadline of up to seven months. Given the extended deadline, Público queried whether it was not foreseeable that measures would temporarily have an opposite effect on the market. In response, the banking supervisor limited itself to saying that “the macroprudential measure aimed at housing credit and consumer credit adopted by the Bank of Portugal aims to promote the adoption of prudent lending criteria by financial institutions and companies, thereby strengthening the resilience of the financial system and safeguarding the creditworthiness of borrowers. ” And “the aim is to act in a preventive way, to avoid excessive accumulation of risk on the banks’ balance sheets and ensuring that households obtain sustainable financing while minimising the risk of default.”
The BdP’s remedies
In a short time, the banks have reduced their minimum spreads by about half. Bankinter has the lowest spread, at 1.15%, followed by Santander, BCP and Novo Banco (1.25%). CGD and BPI’s rates are at 1.5%. “We are back to seeing veritable miracles in loan approvals,” the sales director at one of the largest real estate agents operating in the country told PÚBLICO at the end of February.
Figures for the first quarter demonstrate the increased pace in the concession of residential loans and, even more relevantly, the bank’s reduced margins. Housing loans amounted to €2.186 billion, a 21% increase over the last quarter of last year, the highest figure since 2010.
As reported recently by the Jornal de Negócios, the average rate during the first three months of the year was 1.47%, against 1.57% in December (set of rates, including fixed rates). The majority of the loans are linked to Euribor, whose rate is currently below zero, and interest rates are now expected to reverse their cycle, which will lead to a gradual increase in interest charges.
The BdP has been particularly concerned about the volume of new long-term housing loans, often extending well beyond the normal retirement age (where a reduction in income usually occurs), but also with regards to consumer credit, because many families have loans of both types. In the first quarter, consumer loans, with shorter maturities but much higher interest rates, reached €1.8 billion.
To prevent a return to increases in the level of non-performing loans, the banking supervisor announced measures to “tighten” several lending criteria, such as the effort rate (financial costs versus income), on which it placed a ceiling of 50%. The totality of the loans of any individual must be considered for this criterion.
Another more conservative criterion relates to the ratio between the loan amount and the loan-to-value (LTV), which it limited to 90% for loans for permanent housing for the borrowers’ use, and 80% for loans for purposes other than self-housing. The regulator still allows, however, 100% for loans destined to the acquisition of properties held by the institutions.
The BdP also expects a decrease in the duration of new loans, from 40 years to 30 years for residential loans, and to ten years for new consumer credit agreements. Finally, credit agreements must have regular payments of interest and capital, to counteract loans with deferred payments or grace periods, which distort the real capacity of families to repay their loans.
Original Story: Público – Rosa Soares
Photo: Paulo Pimenta
Translation: Richard Turner