Bad habits die hard.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
So it is that banks in Spain are once again beginning to significantly relax their lending standards. This includes the resurrection of the 100% mortgage, a high-risk instrument that notoriously helped fuel Spain’s madcap property boom over a decade ago. But it’s in the consumer loan market where the alarm bells are ringing loudest.
According to the Bank of Spain, in 2017 banks issued 15% more consumer credit — loans for the purchase of consumer goods like cars, furniture, electrical appliances and holidays — than the year before.
In fact, consumer credit is rising much faster than mortgage debt, according to the Bank of Spain’s latest provisional data. The total amount of consumer credit in Spain rose by 4.5% in just the month of June, from €177.8 billion in May to €186.3 billion in June, while the total stock of mortgage debt rose by a barely perceptible 0.2%, from €524.7 billion to €525.7 billion. In total, Spanish household debt grew by €9.4 billion in June, to €712 billion.
Lending standards are once more dropping at worrying speed. “Given the current low-rate environment, financial institutions could be looking for opportunities to increase profitability at the expense of incurring greater risk,” the Bank of Spain said in its latest financial stability report. “As such, the evolution of this type of credit and its respective default risk will have to be closely monitored in the coming quarters.”
The banks are loving it, however. The margins on mortgages, the banks’ traditional money earner, are still wafer-thin, due to two main reasons: the ECB’s stubborn refusal to raise interest rates for the Eurozone above the 0% mark; and recent legislation banning the banks from continuing to apply scandalous floor clauses, which set a minimum interest rate — typically of between 3% and 4.5% — for variable-rate mortgages in NIRP land.
By contrast, Spanish lenders are able to charge average interest of 8.15% on consumer loans — four times the average rate they charge on mortgages. It’s also 60% higher than the EU average interest rate for consumer debt (5.1%).
In the half-year results announced last week, all six of Spain’s six biggest banks, including even troubled Banco Sabadell, were thrilled by the rate of growth in their consumer loan business. Largely state owned Bankia, Spain’s fourth biggest lender, clocked up a 30% increase in consumer loans between January and June. Bankinter, the sixth biggest lender, increased its lending to consumers by 26%; BBVA, by 24%, Santander, by 20%; Caixabank, by 16% and Sabadell, by 13%. For Bankinter consumer credit accounted for a staggering 27% of its earnings in the first half of 2018.
This is all happening as lending standards are being relaxed across almost all euro-area countries, according to the latest edition of the ECB’s Euro-Area Bank Lending Survey. Even more ominous, the rejection rate for consumer loans declined sharply for banks in Spain and Italy, while it remained virtually unchanged in other Euro-Area large countries.
Both the ECB and the Bank of Spain have requested information from Spanish banks to try to explain why consumer debt is surging so much faster than in other parts of the EU. According to representatives of the banking sector, the answer is simple: rising consumption due to an improving economy. José Luis Martínez Campuzano, spokesperson for the Spanish Banking Association, said: “The demand from families is high because during the crisis consumption was put off and now it’s increasing at an annual rate of 15%.”
Fernando Casero, president of the National Association of Financial Credit Institutions (ASNEF) attributes the surging consumer credit to three main causes:
“First, during the years of crisis consumer credit shrunk much faster than the economy as a whole. As such, it’s only natural that during the years of recovery it increases. Second, after the recession families needed to upgrade or replace their vehicles, electrical appliances, furniture… And finally, job creation is also boosting consumption.”
Casero has a point: new jobs are indeed being created in Spain. This month unemployment fell to 15.3%, its lowest level since 2009. But it’s still the second highest rate in the EU after Greece! And most of the newly created jobs are worse paid and more precarious than 10 years ago. In 2018, 89% of the employment contracts signed were for temporary jobs.
A recent report issued by the Organization for Economic Cooperation and Development (OECD) titled “Wageless Growth: Is This Time Different?” reveals that at a time when nominal wage growth has slowed sharply across all advanced economies, Greece and Spain showed the worst results, falling two points or more below the pre-crisis employment rate. The two countries also boast the biggest increases in labor market insecurity, a measure of how far a worker’s wages would fall after being laid off and then rehired for another job.
Perhaps this prevalent precariousness may also have something to do with Spanish consumers’ newfound appetite (or need) for consumer credit.
Consumer debt is more problematic for lenders than many other forms of credit since it has much less or no collateral backing it, and recovery rates in case of defaults are low. Moody’s pegged recovery rates in Spain for defaulted auto loans at 25% and for other defaulted consumer loans below 5%.
This risk to the banks is why both the ECB and the Bank of Spain are politely asking Spanish banks to apply the brakes before it’s too late. But banks face a stagnant, low-margin mortgage market and besides consumer debt, their other major source of revenue growth are the eye-watering fees they keep hiking on consumers. As such, they will probably politely decline the request. By Don Quijones.
People view paying in cash “as a fundamental freedom, which should not be disproportionately restricted.” Read… The EU Backs Off its War on Cash. Here’s Why
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Based on EU banking experience, I don’t understand why banks (especially Spanish & Italian) don’t just put two baskets outside their office doors:
One would always be filled with euros – account holders (or just crooks) could take out a “loan” by just taking as many euros as they wanted;
The other basket is for loan pay-backs (this could be a MUCH smaller basket.
This idea reduces EU banking overhead, and the money would end up in exactly the same hands as it does now.
The other basket, for loan pay-back, will be filled by the ECB – there is no reason to expect banks to use small baskets for this purpose.
Bernanke taught all of the world’s central bankers that there is no problem that can’t be solved by printing money.
“Both the ECB and the Bank of Spain have requested information from Spanish banks to try to explain why consumer debt is surging so much faster than in other parts of the EU”
Too hilarious! The ECB and the Bank of Spain are the reason Spanish consumer debt is surging. Someone might want to tell the ECB that 0% rates are the cause of this debt binge. Spanish consumers don’t earn the same as other parts of the EU and money lending is super loose so of course they are going to borrow and enjoy their god (Draghi) given right to consume.
Kind of like a wife beater getting angry at his wife for having an ugly black eye.
The stock market is certainly enjoying the continued, and endless, easy money policies from all of the worlds central banks, including the Fed. 1.875% may seem tight by comparison but don’t kid yourself that is very easy money, and minutes from the last meeting indicate they are already discussing becoming more accommodative again – that didn’t take long. Why the hell not start easing again, with a booming economy and assets continuing to rocket higher, pouring gasoline on the fire is just what the doctors (Bernanke-Yellen-Powell) ordered.
Money, money everywhere!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Zero down mortgages are back in the U.S. as well.
https://www.washingtonpost.com/news/where-we-live/wp/2018/02/12/zero-down-home-loans-are-back-be-very-leery/
How do Spanish banks “protect” themselves against those who can’t pay back the loans? A mortgage has some collateral attached to it but the value of collateral in a consumer loan is dubious at best.
Are Spanish bankruptcy laws generally biased for or against consumers?
Spanish banks don’t need any protection – that’s what ECB bailouts are for. Moral hazard exists for a reason – the central banks encourage it.
->How do Spanish banks “protect” themselves against those who can’t pay back the loans?
They buy up politicians to bail them out at taxpayer expense when the banks go underwater, same as most countries.
It’s the usual privatize-the-profits-socialize-the-losses business practice adopted by even the most respected financial institutions, not otherwise specified. That’s why lending standards among commercial banks won’t change even if Spaniards were to make it a tradition to die with their credit accounts maxed out. Not that I would ever publicly approve of such a tradition, of course.
All the incentives for eliminating corruption in the financial industry are routinely rendered meaningless by the incentives for corruption favored the financial industry. Don’t make the mistake of thinking such people are your friends just because they extend you credit. You’d be amazed at just how much malicious intent can be camoflaged behind a happy breezy manner. Don’t think of yourself as a ‘customer’ but as a revenue stream to be exploited, because you be crunchy and taste good with ketchup.
Old Dog
“…Are Spanish bankruptcy laws generally biased for or against consumers?…”
Sufice to say, in Europe, it takes a long, long, long, long, long, long, long time for a bank to take possession of collateral. I may have left off a couple of “longs”.
The fundamental question (illustrated by my “2 baskets” comment above), is why do retail customers continue to deposit their hard-earned money in these corrupt “banks”?
In the UK you can put an individual through to bankruptcy in under 12 months and then the Official Receiver or court appointed Administrator can take control of the assets. UK banks like having a charge over a borrowers property (house) as security.
In Italy it can take years and then the Banks find they are in a queue as the Italians are apparently very good at giving the same security to many different financial institutions, and actually getting your hands on the assets depends on “who you know” in the local and regional governments.
One wonders just how many of the mountain of Italian NPL’s have any security which is collectable, backing up the loans. I assume there are parts of Italy where it would be very “unhealthy” to wander around trying to collect on your NPL portfolio!
->why do retail customers continue to deposit their hard-earned money in these corrupt “banks”?
It’s probably related to why my mattress doesn’t offer free checking, doesn’t pay interest, and never extends credit. For some things, a crooked bank is better than a mattress. For other things, it’s not.
Like the old saying goes, if you want to catch financial fish, you need to pick the right financial bait. I’m still trying to work spearfishing into this analogy.
I bet you a bar of gold to a cheese sandwhich that this doesn’t end well….again
That’s a lot of inflation there, or someone very hungry with a mine.
Hi Don, are the Cet ratios for the Spanish banks still around 10% only?
Between 10 and 12, the last I heard, with Santander towards the bottom of the pile. According to Bloomberg, if you rank the 48 members of the Stoxx Europe 600 Banks by the fully-loaded CET1 ratio, you will find Santander alongside BBVA, CaixaBank, Bankia and Bankinter all in the bottom quartile. Not exactly comforting.
We bought a good second hand car from a garage in Andalucía. It was 10,000€. We had the cash, but were told we HAD to buy it with a bank credit, adding another thousand or so over 18 months. We said, we have the cash. Nope. No deal. In the end, the bank agreed to a shorter time-rate and, hell, we split the difference. Such a story might show part of the current problem outlined above – but as to why, I have no idea.