Bad debt resists rate hikes and falls to 16-year lows

The bank non-performing loan rate closed 2024 at its lowest level since 2008. This is proof that banks and consumers, contrary to initial forecasts, have managed to withstand the cycle of interest rate hikes that began in July 2022 without suffering too many defaults, one of the most sensitive aspects for the financial system. The banks themselves attribute this trend to the good moment of employment and the economy, in addition to their discipline in keeping their balance sheet in check.

Last year ended with a bank default rate of 3.32%, below the 3.52% in 2023, according to data published yesterday by the Bank of Spain. This percentage reports non-performing or doubtful debts, which are those in which payment is delayed for at least three months. In July 2022, when rates began to rise, the consensus among analysts and the Bank of Spain itself was that there would be a spike in default rates. This has not happened.

If in 2021, the last year of ultra-low rates, the default rate was 4.29%, 2022 closed even lower, at 3.5%. It rose slightly and reached 3.62% in May of last year, at which point it began to decline, encouraged by the rate cuts. These percentages are very far from the worst levels of the financial crisis, which reached 13.6%.

Antonio Castelo, an analyst at IBroker, says that the situation is “under control” thanks in large part to the prudence of consumers, even now that rates are falling and mortgage lending is increasing. “Banks are stricter when it comes to granting credit and consumers are no longer getting into the same level of debt as before,” he says. During the rate hikes, part of the savings accumulated during the pandemic were used to pay off mortgages.

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The current amount of non-performing loans is 39.358 billion euros, compared to more than 42 billion at the beginning of 2024. This is also the best figure since May 2008 and contrasts with the almost 200 billion reached during the financial crisis. The credit portfolio of Spanish banks now stands at 1.18 trillion euros.

However, not everything is complacent. The economic scenario in Europe is “complex” and uncertainty is increasing due to greater geopolitical risks, warns the consultancy Neovantas. Banks, it points out, have reduced their provision for liabilities and impairment losses by 5.3% in 2024.

José Masip, partner at Atlas Value Management, attributes the low level of default to the “impact of economic growth” and the drop in interest rates and, by extension, the Euribor. Forecasts place the mortgage rate at 2.18% at the end of this year and 2.16% in 2026. This relief “has a very favourable impact on the default rate” and is accompanied by a “contained” level of inflation.

“We will have to pay close attention to the political situation we are experiencing in Europe with the arrival of President Donald Trump, the application of his protectionist policies and the war in Ukraine, as well as the evolution of energy prices and the withdrawal of aid against inflation,” he said. The key is to prevent unemployment from rising, “currently stable.”

The non-performing loans rate among the major banks in Spain ranges from 2.7% for CaixaBank to 3.7% for BBVA

Meanwhile, banks must work on building up the countercyclical capital buffer required by the Bank of Spain to respond to future crises. This reserve must be established before October 1 and be equivalent to 0.5% of assets. In total, they must allocate 7.6 billion euros until 2026.

CaixaBank, the bank with the most business in Spain, closed last year with a non-performing loan ratio of 2.7% in the country, 4% less than a year earlier. It is the same as Santander, which has reduced it by 12%. BBVA's is 3.7%, 9% less, and Sabadell's is 3.3%, 22% less.

The Bank of Spain's latest report on the financial situation of households indicates that their conditions "have improved during the second half of 2024, reflecting a lower degree of restriction in the ECB's monetary policy."

The low bad debt rate is also the result of the sale of portfolios of problematic loans, with which banks remove the highest risk loans from their balance sheets. The consultancy firm Axis Corporate estimates that the entities have disposed of portfolios worth 8.2 billion euros of low-quality loans.