International credit rating agency, Fitch Ratings, says impaired loan ratio for Spain’s banking sector is likely to peak at between 6.5 and 8 per cent in 2022.
According to the rating agency, asset quality of banks in Spain will weaken due to the economic fallout from the pandemic, particularly as borrower support and forbearance measures expire.
Fitch however, added that it deterioration banks asset quality to be less acute compared to the country’s last economic crisis in 2013, when the impaired loan ratio peaked at 13 per cent.
“Spanish banks front-loaded sizeable loan impairment charges (LICs) in 2020, applying cautious macro-economic assumptions for IFRS 9 provisioning in anticipation of weakening asset quality. We estimate domestic LICs increased to 84bp of gross loans in 2020 from 36bp in 2019 for the ten largest Spanish banks rated by Fitch, with 54% of the 2020 LICs related to the front-loading of future credit losses linked to the pandemic. As a result, the impaired loans coverage ratio for these banks increased by 8pp to 59% at end-2020 on an aggregated basis, providing some headroom to absorb future credit losses.”
“We expect the sector’s domestic LICs to remain higher than in recent years, trending slightly down in 2021 to 60bp-80bp of gross loans. This is lower than in the last crisis but expected credit losses remain sensitive to the pace of Spain’s economic recovery,” stated Fitch in its report.
“Spanish banks’ capacity to absorb still-high LICs without material capital erosion has supported the limited number of rating downgrades since the onset of the pandemic. However, Negative Outlooks on several banks’ ratings signal that medium-term risks remain,” Fitch added.
