The regulator is of the opinion that the amount of dividends paid by Spanish banks is in line with the European average
The Bank of Spain has once again called on the banks to make the necessary cash provisions from now on to deal with the risks facing the economy and, in particular, has urged them to do so “adequately and on time”, before the possible recession in the following quarters.
The chief executive of financial stability, regulation and resolution, Ángel Estrada, has emphasized that the message the regulator has conveyed in its appearances and reports in recent quarters is to ask entities to “take into account the current macroeconomic environment” and that “timely and adequately anticipate that they will emphasize their models,” as conveyed this Friday in the presentation of the Financial Stability Report for the fall of 2022.
The regulator maintains its central economic growth scenario for Spain, which is considering a GDP increase of 4.5% for 2022, 1.4% for 2023 and 2.9% for 2024, but has warned that the possibility of a correction of economic activity has increased in recent months, in a context of persistently high inflation and the prolongation of the war in Ukraine.
This report assesses the resilience of the Spanish banking sector, which would maintain an “adequate” aggregated solvency level in the face of the realities of macroeconomic risks, but has urged the sector to remain “cautious” in provisioning design and capital allocation plans because of the potential for these risks to materialize.
In particular, the regulator has assessed the solvency of the Spanish banking system for the period 2022-2024, considering a baseline scenario closer to economic forecasts with an aggregated GDP growth rate of 9.8% for the period, and an adverse scenario of deteriorating macro-financial conditions, including higher and sustained inflation over time, a significant tightening of financial conditions and a cumulative GDP contraction of 1.3% over the period 2022-2024.
The high inflation envisaged by the Bank of Spain in this negative scenario would be passed on to the costs of households and businesses and would have an impact on much tighter financial conditions, due to the tightening of monetary policy and some increase of the risk premiums, which would reduce the consumption and investment level of the agents.
The regulator has also taken into account other geographic areas in which Spanish banks operate, such as Mexico, Brazil or Turkey, and for the adverse scenario, it takes into account a situation of general stagflation, with low economic growth and high inflation.
The analysis therefore concludes that the overall solvency of the entities would remain at “adequate levels” in light of the economic impact assumed in the adverse scenario. However, the regulator emphasizes that this impact would be “heterogeneous” depending on the entity.
The Bank of Spain points out in its report that the generation of funds and the provisions to cover impairments would serve to maintain the profitability and solvency of both groups of banks, also highlighting the positive impact of the activity abroad from banks with a presence abroad. In the worst-case scenario, these positive elements would not offset the impairment losses in the country, reducing the solvency of the entities in both groups.
The institution argues that the materialization of macroeconomic risks could have a significant impact on capital consumption, although the industry’s loss-absorbing capacity is “sufficient” to maintain an adequate aggregated solvency level.
However, he calls for caution in interpreting his stress test due to the “greater uncertainty” in the economic environment and points out that using higher rate hike scenarios is “a break” from others. which it has conducted in more recent years, where a contraction in demand due to the Covid-19 pandemic has been measured.
In addition, he has called for a “cautious positioning” of the sector when considering its provisioning and capital plans, as well as “close monitoring” of macroeconomic developments with the aim of acting quickly if the risks considered in the report materialize.
With regard to dividend policy, Estrada pointed out that Spanish banks’ average payout ratios are around the average, if not lower, of the rest of the European banking systems and that these levels are “not excessive” from this perspective. , although the recommendation for caution in capital allocation is still on the table.
On the other hand, the Bank of Spain has also studied the situation, in terms of credit risk, of the companies that have benefited from the extension of the grace periods of the Covid-19 guarantee line and concludes that these extensions offer short-term guarantees “signs of lower carrying capacity” of companies. However, to date this has mainly manifested itself as a latent deterioration, in the form of a greater weight of exposures under special surveillance.
In addition, the questionable ratio was 3.8% as of June 2022, falling from 4% for the first time since December 2008, while the percentage of loans under special supervision and refinance declined in the last semester, although loans under special supervision rose above pre-pandemic levels. .
Source: La Verdad
I’m Wayne Wickman, a professional journalist and author for Today Times Live. My specialty is covering global news and current events, offering readers a unique perspective on the world’s most pressing issues. I’m passionate about storytelling and helping people stay informed on the goings-on of our planet.
