Spanish banks need to increase provisions amid economic slowdown, De Cos says

By Jesús Aguado

MADRID (Reuters) -Spanish banks will have to closely monitor risks and increase provisions to cover potential losses as an economic slowdown and energy price hikes are already hurting households and companies, Bank of Spain Governor Pablo Hernandez de Cos said on Tuesday.

De Cos said that a very complex macro-financial situation, marked by high inflation, tighter financing conditions and increased uncertainty, had already led to a slowdown in the Spanish economic activity “in the third quarter and a general downward revision of the growth outlook for the following quarters.”

On Monday, the Spanish government lowered its economic growth outlook for 2023 to 2.1% from 2.7% previously.

Though higher interest rates are expected to boost banks’ financial margins in the short-term, financial supervisors have recently cautioned against the risks to financial stability stemming from Russia’s war in Ukraine.

De Cos said the net impact of the new macroeconomic situation for banks over a three-year horizon could be negative in certain scenarios, when taking into account higher energy prices, greater persistence of bottlenecks in international trade, which would generate further rises in inflation and an additional tightening of monetary policy.

In this scenario, he told lenders to be “very careful” with capital planning and their provisioning policy and that they may eventually need to increase their provisions to cover potential losses.

An increase in insolvencies among clients could lead to an increase in non-performing loans, which in July reached their lowest level since December of 2008 at 3.85%, thanks in part to loan moratoria granted during the COVID-19 pandemic.Bad loans are also far from a peak of 13.6% reached in December 2013.

The Bank of Spain governor said that over a somewhat longer horizon – from one to two years – many of the negative effects on the ability of households and firms to meet their financial obligations of the current shock and expected context could materialise.

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