16.6% of REO Assets to Remain ‘Toxic’ For Next Two Years

18/11/2014 – El Economista

Neither good score given at the ECB’s stress test, nor economical recovery can guarantee easier years for the Spanish banks. Their toxic real estate load, still far from being digested, is said to represent 16.6% of all damaged assets in their balance sheets after two years pass.

The outlook given by Analistas Financieros Internacionales (AFI) is even more pessimistic (18.7%) for the end of 2014. This will not permit the sector to turn the page or to relax the debt collection efforts.

Net defaulting inflow has screeched but new credit, as AFI forecasts, will be not enough to pick the financed stock up and dilute the damaged transactions volume over the outstanding loan.

According to Spain’s central bank, non-performing loans hit highest at the end of 2013 amounting to €191.78 billion and from that point on, decreasing to a nearly €178.69 billion in August (the latest data available). The downward path is marked by less non-payment reporting, better REO property and portfolio sales, once the latter product healthier. However, the load corresponds to an insolvency rate before the supervisory entity ruled reclassification of a €27 billion worth of toxic assets in summer 2013.

Default Rate at 10%

Default in Spanish banks persistently hits over 13% and experts from AFI fear the rate will continue to show around 10% throughout the next two years. If the repossessed property deriving from totally delinquent loans added up, the rate would jump to 16.6%. Green sprouts of upgrade first will root in companies, for which the firm foresees a drop in insolvency from 11.8 to 7.8%, as well as in consumer credit supposed to decline from 11.6 to 8.4%. The least is expected from the housing sector with index falling from 5.5% to 5.2%.

Both default level and the necessity to increase profitability, urge the sector to offer better-priced loans. AFI specialists say a sufficient flow will not be seen before 2016. Banks are more optimistic and state it will in 2o15.

The advance will be progressive and conditioned by customers and product lines. A mere 0.2% refinement is expected in the two years. Efforts turn in case of financing SMEs and consumers where average rates calculated by the Bank of Spain showed 4.54 and 9.87% APR in September respectively, and 3.10% for mortgages. Also, AFI claims new loan approvals will exceed repayments still this year, however it will not happen with mortgages in less than two years.

Deposits at 0.7%

Good news for the banks is that deposits cheapen and post 0.7% but margins’ capability narrows. The situation offers some room to improve balance reporting, above all in 2015, thanks to potential savings on the REO portfolio price adjustment liability, currently repaid 1.64%.

Still, Return on Equity (ROE) is bound to grow 7% within two years, when the bankers expect it to get back to normal (i.e. above 4.2% registered in 2013), although much below the 15% from the pre-recession times.


Original article: El Economista (by E. C.)

Translation: AURA REE