The Bank of Spain warns that the delay will “increase” and that the level will depend on how long the war will last.

The Bank of Spain presented its supervisory report for 2021 this Thursday, focusing on the response the financial sector has given to the pandemic and its impact on its balance sheets. While the regulator acknowledges progress in the situation of Spanish banks, it also recalls that the uncertainty that still remains about the impact of the health crisis on their balance sheet is now adding to the effects of the Ukraine war. “Entities need to maintain a high level of prudence, with adequate and early recognition of the associated risks, in order to maintain confidence in the sector and help maintain credit flow in the economy,” said Governor Pablo Hernandez. De Coss, in the document.

The head of the supervisor notes that Russia and Ukraine have little exposure to the balance of power in Spanish banks, although this does not relieve them of certain risks arising from this armed conflict. “We need to look closely at the impact of the crisis on entities and their borrowers,” Hern .ndez de Coss said in a report. He noted that the focus was on business sectors and population groups for which “the recovery from the post-pandemic was slower or later and which, in addition, are particularly affected by the economic consequences of the invasion of Ukraine.”

The agency stresses that “delinquency will increase” and warns that it faces “too much” uncertainty, which has not diminished since the pandemic, but has “increased”. Keep in mind that there are still 39% of ICO credits that are in the grace period and it is not yet possible to know what the outcome will be. Added to this is the impact of the war, which has a “bad effect” on delinquency, although the agency does not give an assessment of what level it can reach. “Our research says they can be managed, but it will depend on how long the war lasts and whether prices continue to rise,” they said.

That is why the oversight report published annually by this body places particular emphasis on the oversight of financial institutions. This is despite the fact that the analysis of all factors such as maturity, profitability or solvency of banks has improved over the past year. Nevertheless, the Bank of Spain believes that the Spanish banking business still has ingrained problems that it needs to solve. “Banks must continue to be prudent, they can not raise their hands,” they said.

Regarding solvency, for example, he notes that despite the improvement, “ratios remain lower than their European counterparts.” Or in profitability, where the Bank of Spain believes that “the challenge of adapting the structure of entities continues with the narrow margin of interest and growing competitive pressure in the sector.” In the end, regarding the overdue, he emphasizes that “prudence is necessary, as it is possible that in the near future there will be a deterioration in the quality of credit assets, which arise as a result of deferred materialization in the balance sheets of units by some entities. Impact of the COVID-19 crisis.

The Bank of Spain has named six supervisory priorities for this year. First of all, control the credit risk management implemented by banks against the background of possible increases in payments. The second point concerns the business model of banks and their sustainability in narrow margin conditions. It will also monitor the governance of financial institutions. Fourth, the capital strength of banks will be controlled, especially in those banks that have it more concentrated in business or adjusted to their own resources. The fifth priority concerns technological innovation. Finally, the risks of climate change and environmental degradation.

On the issue of governance, the Bank of Spain secretly refers to the Unicaja case, though it does not cite it directly. The Bank of Spain demands that one of the challenges for the sector is to build customer confidence and that there must be “solid” management of entities. Thus, he notes that the role of independent directors in the Bank’s Board of Directors is “fundamental”. Exactly the concern of the supervisors at Unicaja was caused by the chain resignations of three out of six independent directors and the reduction of the number of these representatives on the board of directors.

Another aspect that the Bank of Spain is focusing on is the increase in fees. “The concept of free banking is disappearing,” the agency said. The supervisor is concerned that this increase in the fee charged to customers is due to “transparency”. And, without mentioning specific cases, indicate that they should be “rendered and not for fictitious services”.