Spain: Banking Sector Woes
The last few weeks have certainly been good to the Spanish on the football pitch and the tennis court. But as the sporting hangover begins to wear off, all eyes will return to the ailing economy. Unlike Greece, Spain has not come to the forefront of investor concerns in recent months because of its sovereign debt levels, but rather its banking sector. But so far, the biggest casualty has been a local savings bank, CajaSur. Hardly the colossal bailouts we saw in the UK and US back in 2008. So is all this focus on Spain really justified? The short answer is yes.
The major problem in Spain is that over the past twenty years, the whole banking system became ever more reliant on the construction and real estate sectors. To put this in context, back in 1991, credit outstanding for construction projects and real estate activities constituted 30% of total loans. Now that figure stands at 60%, and the sectors have already begun to deflate. Housing prices have fallen by 12% according to government statistics, but this isn’t close to what the eventual contraction will look like considering that there is a supply glut of more than one million properties in Spain. On top of that, when you factor in that household and private sector leverage has now reached an unprecedented 200% of GDP and unemployment is now the worst in the eurozone at 20%, the perilous situation facing the banks becomes a little more apparent.
Housing & Construction Loans
Don’t Forget, Spain Is Due A Painful Internal Devaluation
The consumption boom isn’t coming back anytime soon and so the economy now needs to rebalance away from domestic demand and more toward external consumption. However, in order to achieve this, Spain will need to make significant productivity and competitiveness gains. As risk watchdog has previously been saying, as a member of the eurozone, Spain can’t achieve this task by way of a nominal currency devaluation and instead is being driven down the internal devaluation route, whereby domestic wages and prices are forced downwards. That is only going to make matters worse for the banks. So where does this leave us?
Regional Unemployment Rates
Whither Spanish Banks?
Well, banks can certainly expect more of their loans to go bad over the next 12-24 months owing to unprecedented headwinds facing the economy. In turn, provisioning by banks will need to rise, squeezing net profit margins further. Stagnancy will likely become the order of the day. All this is a long way of saying that the age of easy credit in Spain is now over. Banks are going to have to focus on “smarter” lending practices, and the smaller savings banks, or Cajas, will need to push forward with their restructuring and consolidation process. For now, the sector looks like it can continue functioning given the relatively benign levels of leverage within the banks themselves, the promise of support from the government, and the continuation of ECB liquidity. One thing is for sure though: a systemic crisis in the Spanish banking sector would completely overshadow events in Greece.