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Reuters, MADRID, July 2 – Spain’s banks, whose margins were decimated by the pandemic, are counting on consumer loans as a high-yield path back to profitability, encouraging lockdown-weary clients to spend large on vehicles, vacations, and home improvements. Consumer lending accounts for only 7% of those banks’ loan books on average, despite rates that are several times greater than those on mortgages. It fell as COVID-19 reached its apex, and with the potential of default on loans taken out before the epidemic still present, some in the business warn that it may be too soon to force millions of Spaniards to take on further debt. Several banks, however, are focusing on consumer lending as a growth sector since they struggle to earn money elsewhere in a low-interest market. In May, Caixabank (CABK.MC), Spain’s largest domestic lender by assets, began extending pre-approved credit to six million of its customers, while Santander (SAN.MC) made comparable offers worth 90 billion euros ($106 billion). Caixabank’s “MyDreams” program, which has yields of up to 11.5 percent, is aimed for purchases of gadgets, household appliances, or renovation projects. In 2021, the bank expects it to be one of its primary revenue generators. “If consumption is revived, so will consumer credit, and this might be a source of increased profitability,” said Eduardo Areilza, senior director at Alvarez & Marsal. Meanwhile, BBVA (BBVA.MC) anticipates a “forced build-up” of pandemic savings, EU funding, and vaccination success to increase car purchases by 8% in 2021 and 24% in 2022, and is offering eight-year loans of up to 75,000 euros at up to 6.9% on its website to that end. According to figures from the Bank of Spain, typical mortgage yields are approximately 1.5 percent. “In Spain, car purchases are often financed, and banks will take a piece of that pie,” a retail banker explained. Credit Suisse and Jefferies analysts see indicators that consumer credit activity is bottoming out and anticipate a rebound. “We would expect momentum to build up through the rest of the year as lockdowns ease,” Jefferies said. “Consumer lending has historically been under pressure during COVID (…) but we would expect momentum to pick up through the remainder of the year as lockdowns ease.” According to Reuters, the worst of the pandemic appears to have passed, and “in this scenario, we are definitely going to be active in consumer loans.” THE DIFFERENCE BETWEEN RISK AND REWARD There are already indications of this type of activity. In the first quarter, new consumer credit at mid-sized lender Liberbank (LBK.MC) increased 7.9% year over year, approaching pre-pandemic levels. Month on month, it increased by 25% at Santander and 19% at Sabadell in March (SABE.MC). According to Jefferies, the recovery will enhance Spanish banks’ profitability, which has been negative since 2020. According to ECB data, lenders’ return on equity (ROE) – a measure of profitability – fell to -3.6 percent in the fourth quarter, well below the euro zone banks’ average of 1.9 percent. The reduction was attributed to a less stable credit climate, with bad loan provisions in Spanish banks totaling 8.7 billion euros in 2020. The country’s central bank asked lenders to set aside even more cash to deal with a possible increase in problematic loans in late April. The bad loan rate in consumer lending increased to 5.52 percent in the first quarter from 5.13 percent in the fourth. That’s still a far way from the 8.2 percent record it set in June 2009, in the height of the financial crisis, according to Reuters calculations, let alone the 13.6 percent top for overall loans hit in the aftermath of the crisis in December 2013. But caution remains the watchword for Andorran Andbank group Chief Executive Officer Carlos Aso, who is aware of the credit overhang created by a 47 percent increase in consumer loans between the end of 2014 and June 2018. “From the time when consumer credit was growing strongly, some problematic loans will inevitably materialize,” he told Reuters. “It’s possible that some Spanish lenders haven’t set aside enough provisions.” (1 dollar Equals 0.8456 euros) Jesus Aguado contributed reporting; Emma Pinedo contributed additional reporting; and John Stonestreet edited the piece. The Thomson Reuters Trust Principles are our standards./nRead More

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