Spain data on doubtful loans for June 2012 – Deposit statistics

BdE released data on doubtful loans for June 2012. They posted a very large increase of €8.4bn to €164.4bn (9,42% of total loans). Total loans increased by about €3bn, driven by repos (+€7.2bn) and ‘Debts repayable on demand’ (+€7.55bn). Mortgage loans decreased significantly by €11.4bn (more than 1% of GDP) to €948.3bn while other fixed-term loans by about €1bn to €480.34bn. Deleveraging (especially in the housing sector) now appears to be going full speed with the results visible on bank balance sheets.

Taking a look at the equity side of credit institutions, we see that net profits were an impressive -€10.54bn in June, while impairment allowances increased by €21.68bn to €148.75bn. The ‘capital and endowment fund’ increased by €3.51bn to €59.24bn while reserves stayed roughly steady at €170.62bn. The troubled state of the Spanish banking sector is clearly visible and the path of the doubtful loans figures is worrying.

The central bank also provided statistics on bank deposits. Overall, they maintained their general level although there were some interesting developments. RoW continued its exodus with balances dropping €22.93bn to €406.59bn. The outflow was more than matched by domestic lending (‘Credit system’) which grew by €59.77bn to €614.67bn (balances were lower than €320bn up until November 2011 when RoW deposits were €508.6bn, an outflow of more than €100bn). The move to domestic financing of the banking sector (financed by BdE lending) is quite evident. ‘Securities other than shares’ decreased further by €13.2bn to €410.7bn, a path they ‘ve maintained throughout 2012.

What is worrying is the fact that government deposits dropped €11.5bn to €68.6bn. Coupled with the lower government deposit balance at the BdE, total government deposits were €75.9bn in June, a figure not seen since December 2011. Based on these figures i maintain my projection that the Spanish government will be able to cover its financing needs until the next round of large bond issuance in October. Nevertheless, the current financial position makes an official bailout more likely since the government is running low in liquid financial assets.

Bank of Spain Balance Sheet June 2012

On Friday, Bank of Spain released its balance sheet data for June which point to large growth in its lending to domestic credit institutions and target liabilities. More specifically:

Assets

MROs increased significantly, from €9.2bn to €45bn while LTROs also posted an increase of a bit less than €5bn, from €315.4bn to €320bn. In total, lending to credit institutions is now €365bn.

Liabilities

The larger growth came from Target2 liabilities, which grew €53.2bn, to €371.8bn (almost 35% of GDP), pointing to a continued capital flight out of Spain. Ever since the second 3Y-LTRO, it’s the first time that Target2 liabilities are more than total bank lending from BdE. Banknotes increased somewhat by €3bn to €70bn, while general government deposits decreased further to only €7.3bn. Coupled with the fact that the deposit facility balance kept falling, with June registering a €27.8bn balance, it is clear that the 3Y-LTRO effect for Spain is now officially over and Spanish banks need to access central bank liquidity (especially short-term through MRO) in order to cover their increased liabilities. Net Other Assets kept their steady decline during 2012, registering at €81.85bn in June.

Actually, if one examines the increased liabilities due to Target2 and banknotes and subtracts new lending from BdE and the drop in the general government accounts, there’s still a bit less than €10bn that was needed to cover outflows, with deposit facility balances being used for that. This could be a sign of banks running out of collateral, especially since the ECB will not accept  government guaranteed bank bonds in its liquidity operations any more. I ‘m not sure that Spanish banks will be able to withstand such volumes of outflows for a long time. Target2 liabilities costs will also make it harder for Spanish banks to make reasonable bids in Spanish government securities auctions since their negatve RoW position plays a role in their cost of funds.

The graph below shows the evolution of both the Target2 liabilities and deposit facility balance since August 2011. The fit of the exponential trendline is quite impressive. Projecting the fit to December 2012 points to a negative balance close to €1.1tr. I think it is clear that the current path is quite unsustainable.