The solvency rating agency DBRS Morningstar sees Spanish banks as “better prepared” to face an increasingly challenging environment “, although it believes” probable “that they will” need provisions for credit losses to cover future defaults “after the strong effort made already by the sector and that penalized their accounts in 2020.
Its evaluation is effected within the general analysis of the economy carried out in the report confirming the “A” rating for the Kingdom of Spain for long-term obligations and its “stable” outlook, considering that the performance of the economy in 2020 ” it has marginally exceeded previous projections “and where it also predicts a” strong rebound in the second half of 2021 “.
Its experts valued that the Spanish banking system “entered the current economic crisis after a prolonged period of improvement in its capital ratios and asset quality”, thanks to the deep restructuring “on a large scale” that the industry had previously carried out, the implementation of stricter regulatory requirements and the recovery of the economy and the real estate market itself.
In this regard, the report highlighted that the most demanding CET1 ‘fully loaded’ capital ratio of Spanish banks increased to 12% in the third quarter of 2020 from 9.3% in the third quarter of 2014, “exceeding regulatory requirements” .
In the same period, the proportion of non-performing loans fell from 8.8% to 2.9%, at a level similar to the euro area average; and, unlike the previous crisis, “Spanish households and companies have tighter balance sheets, with debt levels below those of the euro area, and there is no significant evidence of imbalances in the Spanish real estate market “.
DBRS Morningstar further estimated that the state-guaranteed loan scheme, loan moratorium, and extraordinary liquidity and regulatory relief measures by the ECB “have played a crucial role in maintaining a healthy supply of credit throughout 2020.”
Specifically, he pointed out that the loans guaranteed by the State “slowed down the rate of deterioration in credit quality,” by covering 70% and 80% of the losses that may arise from these loans. However, he stressed that “the vast majority of the banks’ loan portfolio is not covered by this program and it is likely that provisions for credit losses will be needed to cover future defaults.”
In addition, its experts hope that the current crisis “will weigh on the quality of assets, profitability and capital ratios of banks in the coming quarters”, due to these factors and in the context of the situation generated by the pandemic.
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