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.
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