Banco Santander Insists Credit Conditions Not Tightening Despite ECB’s Interest Rate Hikes

The European Central Bank has been raising interest rates at all meetings for just over a year. The objective is clear, reduce consumption and thus lower inflation. One of the main consequences is that the price of loans and mortgages rises, so their demand falls. According to the ECB’s bank lending survey for the third quarter, banks tightened their credit criteria more than expected. However, Banco Santander assures that they are not tightening credit conditions, that the balance falls because there is more demand.

In fact, Héctor Grisi, CEO of the entity, and José García Cantero, financial director, point out that the percentage of mortgages granted is the same as before. “We have not turned off the tap, nor have we tightened the conditions”, assured García Cantero during the presentation of the third quarter results. However, he clarified that outstanding credit is decreasing because fewer applications are submitted.

These statements contrast with the loan survey also carried out by the Bank of Spain, which indicates that the supply of credit maintained its tightening pace in the third quarter. Both the granting criteria and the general conditions of new loans were generally tightened for the sixth consecutive quarter, in parallel with the increase in interest rates undertaken by the European Central Bank (ECB).

Regarding the criteria, the level of tightening was similar to the previous quarter in the case of companies, while in credit to households it was somewhat more pronounced. In the case of particular conditions, the evolution was more moderate for companies while it was similar for households.

“The restrictive evolution of the credit supply would respond to the increase in risks perceived by financial entities, a lower tolerance for them, and, to a lesser extent, the deterioration of their liquidity,” the Bank of Spain has indicated, at the same time which has explained that rejected credit applications increased in all modalities.

According to data from Banco Santander Spain, New mortgage production fell by 20% in this period. Despite the fall, this new production represents 16% of the market. The bank’s directors point out that at the end of the year, the trend will be the same, that is, that new mortgage production will continue to fall.

Grisi has also referred to the 2% drop in the volume of loans that is being recorded, which he has attributed to the rise in rates by central banks to stop inflation. “We have seen a significant drop in credit demand”, points out and clarifies that this is what monetary policy seeks, “to tighten the economy.” When interest rates rise, the demand for credit falls “because people’s funds are not enough to pay a mortgage on a car,” he adds.

The CEO assures that this rate increase has not yet been fully transferred to credits and adds that mortgages in Spain are cheaper than in the rest of the countries. However, the clients’ margin, that is, what they charge for loans and what they pay for deposits, has increased this quarter to up to 3.37% (for all clients, both companies and individuals). That is, the cost of deposits is 0.9% in Spain and the profitability of credit is 4.27%.

Despite this difference, Banco Santander insists that This monetary policy has not been transferred to credits and assures that the difference with the bonus is very wide. “A mortgage has a duration of between 20 and 30 years, if you request a fixed rate mortgage the bank has to offer you an interest rate that is profitable throughout the life of the loan, that is why we compare ourselves with the bond and not with what is paid at that moment for the deposit,” explains the CEO.

Higher mortgage amortization

The bank is also recording greater amortization of mortgage loans. Grisi points out that clients are using the savings they had, especially from the pandemic, to be able to reduce their debt. In the first three quarters, Santander has recorded a volume of 3.5 billion euros in amortization and expects another 1.5 billion euros to be added in the fourth quarter.

This figure would mean that The monthly amortization is just under 390 million euros monthly, which are in line with the data from the previous quarter, when some 300 million euros were amortized monthly. A figure that they expect to extend until the end of the year.