By Jesús Aguado
MADRID (Reuters) – Spanish banks, whose margins were squeezed during the pandemic, are betting on a high yield return to profitability through consumer loans – encouraging customers tired of the foreclosure to spend big on cars , vacations and home renovations.
Consumer lending only represents an average of 7% of these banks’ loan portfolios, although the returns from this business are typically several times higher than those on mortgages.
It has plummeted as COVID-19 peaked and, with the risk of default on loans taken before the pandemic yet to be eliminated, some in the industry are warning that it may be too early to push. millions of Spaniards to take on more debt.
But, as they struggle to make money elsewhere in a low-interest environment, several banks are targeting consumer lending as an area of growth.
Caixabank, Spain’s largest national lender by assets, began offering six million of its customers pre-approved loans in May, and Santander made similar offers worth € 90 billion ( 106 billion dollars).
Marketed under the name “MyDreams”, Caixabank’s program is designed for purchases of electronic devices, household appliances or renovation projects and has yields of up to 11.5%. The bank expects it to be one of its main profit drivers in 2021.
“If consumption is reactivated, so will consumer credit, and this can be a source of improved profitability,” said Eduardo Areilza, senior director of the consulting firm Alvarez & Marsal.
BBVA, meanwhile, expects a “forced build-up” of pandemic savings, EU funds and progress in vaccinations to increase car purchases by 8% in 2021 and 24% in 2022 and, to this end, offers eight-year loans of up to € 75,000 up to 6.9% on its web page.
By comparison, average mortgage yields are around 1.5%, according to data from the Bank of Spain.
“Car purchases in Spain are usually funded and the banks will grab a piece of that pie,” a retail banker said.
Analysts at Credit Suisse and Jefferies are seeing signs that consumer credit activity is bottoming and expect a recovery.
“Consumer loans have generally been under pressure during COVID (…) but we expect momentum to pick up throughout the year as lockdowns loosen,” Jefferies said. .
A retail manager for a Spanish lender told Reuters the worst of the pandemic seemed to be over and “in that context we will definitely be active in consumer lending.”
RISK VERSUS REWARD
There are already signs of such activity.
At midsize lender Liberbank, new consumer loans rose 7.9% year-on-year in the first quarter, approaching pre-pandemic levels. In March, month on month, it increased by 25% in Santander and 19% in Sabadell.
Jefferies expects the recovery to boost the profitability of Spanish banks, which in 2020 turned negative.
Lenders’ return on equity (ROE) – a measure of profitability – fell to -3.6% in the fourth quarter, below the 1.9% average for euro area banks, according to data from the ECB.
A less stable credit environment was a factor in this decline, with Spanish banks’ bad debt provisions amounting to € 8.7 billion in 2020 as a whole.
At the end of April, the country’s central bank urged lenders to set aside even more liquidity to deal with a potential increase in bad loans.
In consumer loans, the bad debt rate rose to 5.52% in the first quarter against 5.13% in the fourth.
This is still far from the peak of 8.2% that it reached, according to Reuters calculations, in June 2009, at the height of the financial crisis, not to mention the peak of 13.6% for all loans affected in the aftermath of the crisis in December 2013.
But for the managing director of the Andorran group Andbank Carlos Aso, aware of the credit surplus linked to the growth of 47% in consumer loans between the end of 2014 and June 2018, caution remains in order.
“Some bad loans will eventually materialize in consumer credit at some point, as long as it has risen sharply,” he told Reuters.
“Some Spanish lenders may not have set aside enough provisions.”
($ 1 = € 0.8456)
(Reporting by Jesús Aguado; additional reporting by Emma Pinedo; editing by John Stonestreet)