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BdE released data on doubtful loans for August today. The total was €178.58bn compared to €173.24bn in July (+€5.34bn), following an increase of €4.87bn in the previous month. If one fits exponential trends for the total of 2011 and for the March – August 2012 period, the calculated rates of increase are 2.14% for 2011 and 3.98% for 2012 with roughly the same R² of around 0.97. In other words, so far 2012 has seen a doubling of the rate of increase. Based on the trendline, doubtful loans will be around €210bn by the end of the year, increasing by another €30bn by then.

Data on equity and impairment allowances was also released. Net profits are still highly negative (-€10.7bn) while impairment allowances increased by €4.24bn to €106.77bn. The banks stress test used a figure of €110bn, which seems to be only a month away.

Overall, the data point to a deep recession (especially if effective flows on loans are taken into account) which makes recapitalizaton urgent. Based on the projected end-2012 figure of €210bn in doubtful loans and €110bn in impairment allowances, capital needs for 2012 are close to €100bn, especially since banks do not appear to be producing any profits. This will probably mean a combined use of a ‘bad bank’, burden sharing by subordinated and hybrid debt holders and a large part of the €100bn EFSF loan. So far, the projected €60bn capital needs seem optimistic as long as banks do not produce profits and are able to dispose of assets without further losses.

On a related macro note, the Spanish Treasury has made August debt data available. Total average interest rate is now 4.12% (compared with 4.02% in March) while total central government debt is €608.2bn, producing an annual interest of roughly €25bn, or around 2.4% of GDP, without counting debts of other branches of the government. Just for comparison, on January 2011 the corresponding figures were 3.74% and €548.6bn making the annual interest equal to €20.5bn, an increase of 0.5% of GDP.

What is really negative is the data on the government debt market turnover. Although the T-Bills market has held steady, government bond market turnover outright transactions have dropped to almost half compared to the first months of 2012 (when the LTRO effect was strong), while repo turnover went from €39bn in February to €26bn during the summer. It will be interesting to see the market September figures.

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 released its data on doubtful loans for May. They increased by € 3.1bn to €155.84bn. It seems that doubtful loans are growing around €3bn each month. If this trend continues, they will be more than €20bn higher by the end of 2012 which will probably lead to an equivalent capital injection to Spanish banks.

Household deleveraging is also evident from BdE data. Mortgage loans dropped €6.4bn in May to €959.8bn and were the main driver of the drop in total loans (down €10.3bn to a total of €1740.6bn). The deleveraging rate is now almost 1% of GDP, which is close to 12% annualized. Coupled with the large capital flight annualized rate of close to 50% one can only conclude that Spain is heading for a large wall.

The above is also evident in the impairment allowances, which increased €11.65bn in May. Banks equity position is starting to fall significantly due to large drops in reserves (down €13.27bn) while net profits are still marginally negative.

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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Kostas Kalevras

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