Spain’s banks, their margins slashed during the pandemic, are betting on a high-yield route back to profitability through consumer loans – by encouraging lockdown-weary customers to spend big on cars, holidays and home improvements.
Consumer lending on average makes up just 7% of those banks’ loan books, though yields on that business are generally several times higher than on mortgages.
It plummeted as COVID-19 peaked and, with the risk of defaults on loans taken out before the pandemic not yet eliminated, some in the industry caution that it may be too early to push millions of Spaniards into taking on more debt.
But, as they struggle to earn money elsewhere in a low-interest environment, several banks are targeting consumer lending as a growth area.
Caixabank (CABK.MC), Spain’s biggest domestic lender by assets, began offering six million of its customers pre-approved credit in May, and Santander (SAN.MC) has made similar offers worth 90 billion euros ($106 billion).
Marketed as “MyDreams”, Caixabank’s programme is designed for purchases of electronics, household appliances or refurbishment projects and carries yields of up to 11.5%. The bank expects it to be one of its main earnings drivers in 2021.
“If consumption is reactivated, consumer credit will be too, and that can be a source of improved profitability,” said Eduardo Areilza, senior director at consultancy Alvarez & Marsal.
BBVA (BBVA.MC), meanwhile, expects a “forced build-up” of pandemic savings, EU funds and progress with vaccinations to increase car purchase by 8% in 2021 and by 24% in 2022 and, for that purpose, offers eight-year loans of up to 75,000 euros at up to 6.9% on its web page.
By comparison, average mortgage returns are around 1.5%, according to Bank of Spain data.
“Car purchases in Spain are typically financed and banks will grab part of that pie,” a retail banker said.
Analysts at Credit Suisse and Jefferies see signs that consumer loan activity is bottoming out and expect a resurgence.
“Consumer lending has been typically under pressure during COVID (…) but we would expect momentum to pick up through the rest of the year as lockdowns ease,” Jefferies said.
A Spanish lender’s retail executive told Reuters that the worst of the pandemic seemed to be over and “in this context we are definitely going to be active in consumer loans.”
RISK VERSUS REWARD
There are already signs of such activity.
At mid-sized lender Liberbank (LBK.MC), new consumer lending rose 7.9% year on year in the first quarter, nearing pre-pandemic levels. In March, month on month, it rose 25% at Santander and 19% at Sabadell (SABE.MC).
Jefferies expects the pickup to boost Spanish banks’ profitability, which in 2020 turned negative.
Lenders’ return on equity (ROE) – a measure of profitability – fell to -3.6% in the fourth quarter, below the average of 1.9% of euro zone banks, according to ECB data.
A less stable credit environment was a factor in that drop, with Spanish banks’ bad loan provisions rising to 8.7 billion euros in 2020 as a whole.
In late April, the country’s central bank urged lenders to set aside even more cash to cope with a potential rise in bad loans.
In consumer lending, the bad loans rate rose to 5.52% in the first quarter from 5.13% in the fourth.
That’s still a far cry from the peak of 8.2% that, according to Reuters calculations, it reached in June 2009, at the height of the financial crisis, let alone the 13.6% peak for overall loans hit in the crisis’ aftermath in December 2013.
But for Andorran Andbank group’s Chief Executive Officer Carlos Aso, mindful of the credit overhang from the 47% growth in consumer loans between the end of 2014 and June 2018, a caution remains the watchword.
“Some bad loans will eventually materialise at some point in consumer credit, from the time when it grew strongly,” he told Reuters.
“Some Spanish lenders may not have set aside enough provisions.”
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