Banks Pass Stress Test; Will They Start Lending?

Banco Santander

Banco Santander

Spain’s banks sailed through the much anticipated “stress test” by the European Central Bank last week, leading to speculation that the banks will soon ramp up their home lending again.

The only Spanish bank to fail the test was the tiny Liberbank, which showed a capital shortfall of €32.2 million euros at the end of 2013. But Spain’s other 15 banks were able to demonstrate sound balance sheets, two years after accepting a €41 billion bailout from the European Union.

“The reform and restructuring process of the Spanish banking system carried out in recent years has borne fruit,” Bank of Spain governor Luis Maria Linde told reporters.
“Lenders in our country face the future with healthy balance sheets and a solid solvency positions.”

But now the big question facing the property industry – will the banks start lending on residential property again?

Already there are scattered signs that banks are once again ready to finance home purchases. Last week EVO Banco announced that it had recently underwritten almost €50 million in home mortgages under its new “Intelligent Mortgage” product, which is tied to euribor fluctuations. And Bankinter reported a 17.9 percent jump in net interest income in the first nine months of 2014, €545 million euros.

Caixabank also posted net interest income growth of 8.39 percent in the third quarter, to €1.06 billion.

Analysis

Passing the stress test is a good sign for the banking system, but it doesn’t hide the problems with their balance sheets. Overall, Spanish banks’ nonperforming loans remain at 13.25 percent of total loans, only a slight drop from the end of 2013.

There is some anecdotal evidence that lenders are starting to seek out mortgage customers. But until they reduce their bad loans and conclude that property prices are no longer dropping, there is unlikely to be a flow of new financing to the real estate market any time soon.

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