Spain - NPLs Hit A New High, House Prices Keep Plunging

Includes: EWP
by: Acting Man

Bad Debts Hit New Record High

Marketwatch informs us that the record-breaking streak in bad loans in Spain's banking system continues. This is not terribly surprising at this juncture. Mortgage loan defaults have hitherto been held relatively low firstly because borrowers were hanging on for as long as they could as such loans are of the full recourse variety in Spain (so far … this may well change due to growing political pressure). Secondly, the banks were engaging in all sorts of extend and pretend measures. However, unemployment keeps rising and house prices keep falling (in fact, they are falling quite fast lately), so naturally defaults are now increasing even further.

“Bad debts held by Spanish banks rose to their highest level on record in September, the country's central bank said Monday.

According to preliminary data, non-performing loans grew by over 3 billion euros ($3.8 billion) to EUR182.3 billion, or 10.7% of total outstanding loans. That compares with a 10.5% bad-loan ratio in August.

Bad loans have risen every month for over a year, amid an increase in defaults by home builders, high unemployment and weak domestic demand. Total loans, however, have fallen slightly as banks seek to lower their risk profiles. In September, total loans inched higher on the month to EUR1.7 trillion–or around 170% of Spain's gross domestic product--but they remain well below their all-time high of more than EUR1.8 trillion hit at the peak of Spain's property bubble in 2008.

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Here is an updated long term chart of Spain's NPL's compared to GDP growth rates and the unemployment rate:

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Spain's NPL's as a percentage of all loans, compared to the annualized change in GDP and the unemployment rate, via Scott Barber/Reuters.

House Prices in Free-Fall

The latest TINSA report shows that the year-on-year decline in the official property price index (the IMIE General Index) has accelerated to 12.5%. The cumulative decline since the top of the market in December 2007 now amounts to 33.2%. The price declines are even worse in the major cities and on the coast.

This is remarkable, as TINSA data have traditionally tended to understate the decline in house prices (the appraiser is majority owned by the banks).

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The year-on-year percentage change in TINSA's house price index since October 2002. The decline in Spanish house prices has accelerated to 12.5% last month.

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The IMIE General Index since 2001 .

Head of Banking Association Urges More Lending and Building (?)

Given that bad loans keep growing and house prices keep plunging one would expect restraint on the part of lenders. Apparently one would however be wrong, according to the head of Spain's Banking Association, Miguel Martin. He reportedly wants the banks to extend more mortgage credit and has allegedly also discovered a need to build more houses in Spain. Our first thought was that this is understandable, given that there is only one house per 1.7 persons in Spain (not a typo). Clearly Spain needs more housing!

We quote from this rather badly translated report (we leave it as is, as it can be understood even so – unfortunately no better version could be found):

“The Chairman of banking employers, Miguel Martin, has called this Monday for building more houses and give more mortgages, instead of putting “more obstacles” that mortgage credit re-emerge when needed.

In his view, social exclusion does not create the mortgage but the crisis and warns that people could not have their own homes if it weren’t for the banking.

In addition, as explained in his speech at a meeting organized by the new economy Forum, credit helps to overcome the crisis and to protect people in danger of becoming homeless, you have to build more houses.

In a letter sent last weekend to directors of media, the Spanish Banking Association (AEB) Martin presiding, considers that it would be “harmful” to undertake “draft reforms” in the mortgage law as a way of fighting against evictions.

It could “break the legal certainty” for creditors and you raise and would limit the credit to access to housing, I explained to employers in the missive.”

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At first we thought that Miguel Martin has probably lost his mind and urgently requires a psychiatric evaluation before one can let him continue as head of the banking association. Then however it dawned on us that something may actually have been lost in the bad translation. Obviously his main worry is the plan by Spain's government to halt evictions of borrowers that can no longer pay their mortgages by decree. This would destroy 'legal certainty' for creditors according to Martin, and he is definitely correct on that point. So his remarks regarding more lending and the building of more houses may have been taken out of context here – very likely he was referring to a putative future recovery, which would be impeded by these new laws.

However, the banks must expect that the government will begin to worry more about keeping the peace than about the legal certainty of creditors. News of a number of desperate people that have committed suicide after having been evicted have created a political firestorm and a potential public relations debacle for the government. In this emotionally charged atmosphere, rational arguments may not carry the weight they perhaps should. For the government halting evictions by decree is the simplest solution, even if it is not a very good one.

Santander (NYSE:SAN) to Invest in Bad Bank

We have previously noted that the official announcement about how Spain's "bad bank" will value assets was a positive one: clearly there would be no attempt at overvaluing dodgy debt. Writing down unsound credit to its true value is a sine qua non if one wants to bring things back to a sound footing.

This initial impression has now been strengthened by news that Santander plans to invest in the "bad bank." After all, Santander would not do this if it didn't see an opportunity to actually make money.

Reuters reports:

Spain's Santander plans to invest in the country's so-called bad bank in a sign that healthy domestic lenders are willing to support the entity created to clean up the aftermath of a 2008 property crash.

"The bank plans on investing in the bad bank," a spokesman for Santander, Spain's biggest bank, told Reuters on Saturday.

Spain has set up the bad bank to siphon off toxic real estate assets from bank balance sheets that date from the property crash. The bad bank's creation is a condition of receiving up to 100 billion euros ($127 billion) of aid in a European bail-out of the country's financial sector.

Spain's second biggest bank, BBVA (NYSE:BBVA), is considering investing in the vehicle, but has yet to make a decision, a BBVA spokesman told Reuters on Saturday. Sabadell (OTC:BNDSF) is also considering investing but has not yet made a decision, a Sabadell spokesman said. The bad bank's managers are currently in talks with BBVA, Sabadell and Barcelona-based Caixabank (OTCPK:CAIXY) about them investing in the vehicle, a banking source said. Caixabank was not immediately available for comment.

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Now one must hope that it's not a case of a bad bank investing in a bad bank