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Defaulted Property Loans In The Banking Sector Fall For The First Time In The Financial Crisis

14/08/2014 – El Economista

The five large banks show a 9,5% reduction in the balance of bad debts since December
Financing with a risk of going into insolvency falls by €1.000 million.

The real estate sector, the biggest headache for the banking sector in the last few years, is starting to show signs of a timid improvement after a contraction of colossal proportions. This is the indication given by the five largest banks, which have not transferred assets to the bad bank, by reducing the volume of defaulted consumer loans for the first time during the financial crisis.

Specifically, Santander, BBVA, La Caixa, Sabadell and Popular have together managed to reduce this type of bad loan by 9,5% in the first half of the year compared with the end of 2013.

At present, finance given out by these banks to real estate companies in Spain and which is more than three months behind in payments amounts to €41.233 million, that is, €4.322 million less than at the end of last year.

The fall is nonetheless still slight, since in year on year terms these problematic loans have slightly increased. In June of this year the defaulted portfolio is 2,7% higher than at the end of the first half of 2013.

Nevertheless, the reduction has allowed the banks to lower the volume of total bad debts. The main bankers have underlined in recent weeks, during the presentation of results, that the doubtful loans had fallen in the first six months of this year, therefore starting a new trend.

Reduction of subprime loans

The decline of bad debts has also been accompanied by a reduction in loans to property developers which are considered subprime (up to date with payments but with a high risk of defaulting). In the five large banks this category of loan reduced by 1.142 million, to slightly less than 8.000 million.

This means that there is a lower risk in the immediate future that the volume of bad debts will rise, since subprime loans are the forerunner of defaulted ones.

Of the big five, Banco Popular is the only one to have not yet managed to reduce the level of defaulted loans to property developers, although it has stabilised them, since they have barely grown 0,5 per cent, up to 11.600 million. With this rise and the reduction recorded by the rest, it is now the banking group with the highest levels of doubtful financing. As well as the defaulted loans, it has on its balance sheet a further 2.266 million which is qualified as subprime.

La Caixa, on the other hand, is the bank which has recorded the greatest reduction, one of 18,5%. In its  case, the level of insolvent loans is around 9.760 million. Sabadell bank’s portfolio of defaulted loans, not covered by funds used to help CAM bank, has also recorded a significant fall, more than 12%.

The financial sector, an important player in the property boom in Spain at the start of this century, has been obliged to suffer a real hardship after the outbreak of the financial crisis. It has had to recognise millions in losses, the majority related to the construction industry, due to the suffocating of property developers as well as some households, which have stopped paying their debts after the fall of the sector, and the consequences this has had for the economy.

The financial system, at the time when it was recognising provisions to cover the hole, was carrying out swaps of debts for properties in order to recover part of the losses in the future.

Portfolio of homes

As a result, the stock of homes and plots of land in the hands of the banking sector has been rising exponentially. At the end of June, the portfolio of properties –which includes holdings in development companies – reached historical maximums in the case of the five large financial groups. Its gross value has reached almost 71.000 million.

In spite of the acceleration of sales in recent months and the fall of defaulted loans to property developers, in the first half of the year this stock began to grow again. Its value rose by 4% (2.811 million).

A large part of the rise is due to the increase which both the portfolio of plots of land and the repossession of family homes have experienced due to insolvencies.

Properties owned by the banks are also proving to be a major obstacle for the banking sector, since it is having to recognise significant provisions in order to bring forward future losses and to reduce their value with the aim of selling them as soon as possible.

The provisions recognised by Santander, BBVA, La Caixa, Sabadell and Popular amount to 35.200 million, with which the level of coverage of this risk exposure is around 50%.

The swaps of assets for debts, the conversion of the debts to defaulted ones, some sales of loans and the expiry of other credit lines is reducing finance provided to developers of the sector at an accelerating rate, at a time when new loans are not being issued. Loans are only restructured in order to provide means of assisting companies to pay.

The big five banks have reduced this type of loan to less than 69.000 million. In 2010, according to data available, the quantity exceeded 102.000 million.

Slow recovery

The situation, with these figures, is hopeful. The signs are that the contraction of the bricks and mortar sector and its effects on banks seems to be coming to an end, although the banks are not celebrating yet, since the recovery needs to be confirmed and it is expected to be a slow one.

The consequences of the sinking of the property sector have been such that Spain was obliged to request a bail out from Europe in order to cleanse a large part of the financial sector and create a bad bank, known as Sareb, with the devalued assets. This company has assumed 50.000 million in loans to developers and properties of the rescued banks.

One of them was BFA-Bankia, another of the country’s large banks. After the handover of these assets to Sareb, its exposure to the property market was limited to less than 2.300 million in loans, of which 1.453 million are in default and another 250 million considered subprime.

Furthermore, its portfolio of properties has been reduced by some 5.350 million, thanks to the transfer of homes and land of significant value to Sareb and a minimum reduction of such assets in the last six months due to an increase in sales. In BFA-Bankia’s case, the coverage of this stock is 44,5 per cent, five percentage points below the average of the five big banks which have not received bail outs.

Original article: El Economista (by F. Tadeo)
Translation: Aura REE