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Is Bad Loan Report Good News for Property?

For the first time since 2006 Spanish banks reported a decrease in bad debt in the first quarter, which was immediately interpreted as another sign that the property market is poised for recovery. That may be an overstatement of the data by pundits – or wishful thinking – but there is no doubt the bank report is a positive sign for the property market.

The drops in bad loans, which are primarily property related, were not very large. From the end of December to the end of March, Sabadell’s bad-debt ratio fell from 13.6 per cent to 13.5 per cent. Caixabank reported that its bad loan ratio fell from 11.7 per cent to 11.4 per cent. The rest of the major banks are scheduled to report in the next few days.

Sabadell executives suggested the drops were not an isolated phenomenon.

“We do believe this marks a shift in the trend,” Sabadell’s chief financial officer Tomas Varela told a news conference.

Sabadell executives also made it clear they believe the decreases will continue. “We think it’s a change in the trend,” Jaime Guardiola, Sabadell’s chief executive officer, told reporters. “Each quarter we will keep giving good news.”

CaixaBank reported a 52 per cent drop in loans newly classified as in default compared with the fourth quarter. Assets classified as “dubious” fell by 1.4 billion euros in the quarter.

But not everybody was ready to proclaim a new era. “It’s definitely positive that there are signs that NPLs are peaking,” Benjie Creelan-Sandford, an analyst at Macquarie Inc. in London, told Bloomberg. “The question now is how provisions will trend and how quickly these charges will normalize.”

In the new math of Spanish banking, any news is good news. But these declines still represent a very small movement, even if it is in the right direction.

But it does fit into a generally optimistic shift in the market indexes. The bank’s bad debt numbers come on the heels of the Bank of Spain’s forecast for a 1.2 per cent increase in Spain’s GDP in 2014, the type of shift in the economy’s fundamentals necessary for a sustainable market rebound.

For the property industry, the key metric for the banks will be an increase in residential property lending, which remains stagnant, with prospective buyers turned away by the inability to arrange affordable financing. The bank’s improved balanced sheets won’t impact the market until they show an increased willingness to put their money to work. When the banks start lending again, then the industry can start touting a real recovery.