Bank of Spain released details on private credit and doubtful loans developments for May. According to the data:

  • Total lending dropped to €1750.9bn, down €17.6bn from March, signaling a significant deterioration of credit demand. A detailed analysis shows that mortgage credit registered a decrease of €9bn to €966.2bn (a development which can only be bearish for the house market) while repos posted a large drop to €39.9bn (from €51.2bn in March). In general, the mortgage and repo markets show clear signs of accelerating deterioration in April.
  • Doubtful loans increased to €152.7bn, a change of €4,8bn from March. Overall, doubtful credit is now over 14.3% of GDP and does not show any signs of stabilizing.

The central bank also released data on the equity side of bank balance sheets. Net profits turned negative in April while Valuation Adjustments were – €7.1bn, strengthening a negative trend in 2012 (up from – €3.8bn in March). Impairment allowances kept their increasing path, at €115.4bn (from €113.1bn in March). Negative GDP growth, stressed interbank financing conditions and negative credit growth/demand clearly increase the risk of maintaining a negative net profit position for credit institutions. This will make increasing impairment allowances more difficult and require assistance from the Spanish state. Based on the gap between doubtful loans and impairment allowances the €40bn assistance is the bare minimum. If net profits and doubtful loans keep their current trajectory a capital injection of more than €80bn seems quite possible.

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