Funcas believes that the Spanish banking sector would still have to make provisions amounting to 12 billion euros in the income statements of 2021 and 2022, and expects an increase in doubtful credit between the end of 2022 and early 2023.
Specifically, Funcas estimates that the “peak” of doubtful credit will be reached between end-2022 and the beginning of 2023, with a subsequent recovery. So NPLs will be close to, but slightly above, pre-Covid-19 pandemic levels in 2024.
It also expects growth in non-performing loans to be around €40 billion between 2021 and 2022.
By credit segments, and in relative terms, Funcas expects the most damaged to be consumer credit, “traditionally more vulnerable.“
On the other hand, mortgage loans would be the least impacted, registering a more contained rise after the end of the ERTEs, a measure they consider has been effective so far in containing the flow of defaults.
However, Funcas forecasts that the greatest impact in absolute terms will occur in the corporate segment, although with disparity by sector and by geography.
In this respect, the Funcas analysis center expects a particularly significant increase in the default rate in those sectors most vulnerable to the pandemic, such as hotels, leisure or transport, etc. Meanwhile, in sectors with less exposure to the effects of COVID-19 it expects slight increases or even decreases.
More provisions in view of the increase in non-performing loans
In the same article, Funcas also points out that given the increase in impairments attributable to the effect of the pandemic, around some 40 billion euros, and assuming an average coverage rate of 60%, banks would still have to provision around 24 billion euros “in the total horizon of three years”, including 2020.
The Foundation flags that the “significant” effort to clean up credit carried out in 2020 by Spanish banks means, however, the early recognition of approximately half, 47% of these losses associated with the upturn in non-performing loans.
As a consequence, and according to its NPL estimates, Spanish institutions would still have to recognise slightly more than 12 billion euros of credit impairments in the income statement in 2021 and 2022.
That said, as regards the Spanish banking sector data for the first quarter of the year, Funcas points out that the provisions made in that period “present a notable deceleration” compared to 2020, although they remained at levels higher than those of 2019.
The provisioning effort of the first quarter would be equivalent, if maintained in 2021, “to a third of what is pending provisioning after what was done in 2020,” says Funcas. It considers that with this pace “the complete digestion of the effects of the pandemic would be delayed until the end of 2023, a horizon that may be considered somewhat lax by the supervisor in view of the recent messages launched by the same.”
On the other hand, if we wanted to accelerate the pace to complete “the digestion” by end-2022, “the provisioning effort to be made during the 2021 financial year should be somewhat higher,” between 20%-25% more than that made during the first quarter.
