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Spanish banks face higher provisions in 2021 if economy, tourism fail to recover

An uncertain economic outlook, a potential delay in the all-important tourism sector recovery and a slower pace of higher credit risk recognition than European peers will require Spanish lenders to recognize higher provisions in 2021 than they anticipate, according to analysts.

The coronavirus pandemic has raised concerns about rising bad loans at Spanish banks as corporates face difficulties in repaying loans in a challenging economic and health context.

Spain is the 10th-most affected country globally by COVID-19 in terms of mortality, with more than 69,140 deaths as of March 1, according to U.S.-based Johns Hopkins University. The Spanish economy has also taken a bigger hit than most European countries in the fourth quarter of 2020, with GDP contracting 9.1% in the period, compared with a contraction of 5% on average in the eurozone, according to the EU statistics office.

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Cost of risk — the main metric for calculating loan loss provisions — rose sharply for the largest five Spanish banks by assets in 2020 from 2019, according to S&P Global Market Intelligence data. At the country’s two largest banks, Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, cost of risk rose to 135 basis points from 99 bps and to 162 bps from 102 bps, respectively, as the lenders frontloaded expected losses from coronavirus-related loan defaults.

Both banks said during earnings presentations that they expected cost of risk to decline in 2021, but warned of uncertainties. CaixaBank SA, which is acquiring Bankia SA, predicted loan loss charges in 2021 would be “well below” 2020 levels, while Banco de Sabadell SA estimated 2021 cost of risk to be lower.

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“Given the economic environment, I wouldn’t rule out a higher cost of risk this year,” Pablo Manzano, vice president for global financial institutions at DBRS Morningstar, said in an interview. “To see some kind of normalization we need to see, maybe not a full recovery, but to be in the path of a full recovery. This is not the current situation. We are still in a very uncertain economic environment.”


Citing the European Banking Authority Risk Dashboard report, Manzano said there were signs that banks in Spain are lagging European peers in recognizing stage 2 loans — loans for which credit risk has increased significantly. According to the report published Jan. 13, the stage 2 loans of Spanish banks rose by 20 bps in the first three quarters of 2020.

ECB data also shows that Spanish banks’ gross nonperforming loans and advances as a percentage of total gross loans and advances stood at 2.95% at the end of the second quarter of 2020, compared with 6.32% in Italy and 2.33% in France.

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As the coronavirus outbreak unfolded in Spain, the government responded with a €100 billion loan guarantee scheme in March 2020 then another €40 billion in July of the same…

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