Banks: the rise in interest rates against the possible increase in non-performing loans

Uncertainty. That is the word that is repeated the most when talking about the economic forecasts for 2022. Something that also affects banking.

The latest rise in interest rates by the European Central Bank It gives oxygen to the banks, which have had their accounts marked by negative rates for several years now. Now the question is what will happen to the inflationhow this will affect consumption and households and, therefore, delinquency.

“The rise was in a discounted range. Interest rate hikes introduce an environment of normalization in the financial markets because risk can be better evaluated in relation to profitability. It is a context in which investors can focus on more traditional companies (such as banks) and reduce their exposure to others with more uncertainty”, explains Santiago Carbó, professor of Economics at the University of Granada and director of Financial Studies at Funcas. Business Insider Spain.

The traditional banking businessthat of borrowing money cheaply and lending it more expensively, It has been complicated for years by the anomalous situation of the monetary policy of the European Central Bankthat pushed rates into negative territory to try to get credit flowing to the real economy.

“For financial entities, a more favorable environment is generated to obtain margins, but we are not talking about a panacea for two reasons. The first, inflation is very high and makes real returns (discounted that inflation) negative. The second , there is a lot of economic uncertainty and downside risks that are bad for jobs and, therefore, for delinquency”, adds Carbó.

These 3 graphs show how banking has changed during the pandemic and how the Spanish economy has evolved

The scenario has changed and there is a return to the normalization of monetary policy. However, the turnaround in interest rates comes at a difficult time at the macroeconomic level. After two years in which the economy has been weighed down by the COVID-19 pandemic, the outlook for GDP was growth. But the war in Ukraine and the unstoppable rise in energy prices have changed the scenario.

Now, high inflation and macroeconomic forecasts complicate a scenario where households and companies could see how difficult it is to face expenses. In this context, delinquency, which has been very controlled until now, could rebound.

What will happen to delinquency

“The rise in non-performing loans is a possible danger, but we must bear in mind that it is relatively low. It is not a scenario that should worry us yet,” explains Antoni Cunyat, collaborating professor at the UOC’s Economics and Business Studies, to Business Insider Spain.

Although the impact could be moderated by the abundant provisions that the banks were setting aside during the COVID-19 pandemic and that have not yet been released. At the start of the global health emergency, the entities made provisions in the millions that finally, broadly speaking, they have not had to use, since the economic impact of the pandemic on families and companies was mitigated by government aid, but that they have not released either.

“The final scenario is uncertain because, although the intermediation margin can be recovered with the ECB rate hike, the macroeconomic picture is complicated and this affects the demand for banking services and the quality of its assets,” says Joaquín Maudos , deputy director of the Ivie, to Business Insider Spain.

“Nevertheless, The increase in non-performing loans is not immediate, so the forecast is to close with a return that is close to the cost of raising capital. This profitability is lower in the business in Spain than in the consolidated groups (which includes the business of subsidiaries abroad),” warns Maudos.

“Delinquency is an important issue, but, for the moment, it seems under control. I don’t think that the rise in interest rates will translate directly into large profits in the short term, at least in terms of interest margins. The “volume” effect ” is also important and, in this sense, credit is not growing much nor will it in an environment of uncertainty.

On the other hand, when banking profits are evaluated (even to set a tax) one is looking at the total amounts and not at the relative profitability (earnings per share or per assets). In the latter case, the banks continue to have fairly tight returns and an additional tax would not help,” Carbó points out.

Doubts about the new tax on banks

One of the keys that will mark the coming months for banking will be the new tax on banks. The Government announced, by surprise, that a new tax on entities was going to be implemented in 2023, which at first was said to tax their extraordinary profits at positive rates.

though later, it was nuanced that this tax would be on the margins of financial companies with a rate of 4.8% for the intermediation margin (net interest) and net commissions.

In the absence of being processed in Congress and the details of the text are seen exactly as they are, the text presented considers that this amount is not “disproportionate if past or estimated profits for the coming years and dividends distributed to shareholders are considered” .

The banking tax will be mandatory for all financial entities whose interests and gross commissions charged to customers exceeded 800 million euros in 2019.

There have already been discordant voices, not only from the sector itself, but also from regulatory bodies, such as the ECB.

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