El Pais

Bank of Spain report warns that property lending is growing too much, too fast

A new report on financial stability by the Bank of Spain has warned that while the country's banks are more profitable than their European competitors - profits rose 19 percent in 2004 -, and have consistently reduced their costs, they have failed to attract sufficient numbers of clients who save their money to cover a 20 percent increase in lending last year.

The central bank also warned of an over-dependence on property investment, and that liquidity levels are at their lowest in a decade.

Santander Central Hispano's purchase of Britain's Abbey National has distorted the overall picture to give a sunny outlook, the report says, but the underlying problems still remain.

The robust health of the Spanish economy, which is growing faster than the European average, "explains in large part the expansion by the country's financial companies," and is reflected in a sharp rise in lending. The Bank of Spain said, however, that most borrowing is related to the property sector, and "is used by families for purchases, by construction firms or developers."

The report goes further, noting that if property is taken out of the equation, things would be very different. Non-mortgage loans by banks and savings banks have grown by an average of 9 percent. Three quarters of the growth in credits to the private sector is related to property.

Loans to property developers have increased over the last year by 43.2 percent, twice the figure for families. "These types of loans have resulted in high rates of non-payment," says the report, which goes on to say that savings banks are taking over this loans sector.

Thanks to Spain's property boom, savings banks are, for the first time, lending more money than banks. The report says that if mortgages are removed from the equations, banks still control the market.

In spite of everything, there is little to be done to improve indebtedness. "The generally high performance of both the Spanish and world economy, particularly in Latin America, explains the reduction in debts," the report says. Nevertheless, it points out that "the strong increase in lending, which could easily develop into a situation of non-payment of loans, requires the permanent attention of financial entities."

The Bank of Spain also cited the high levels of non-repayment of loans for consumer goods. Companies specializing in instant credit "have non-repayment levels seven times higher than the rest of the sector."

Spaniards have not financed the mortgage boom either, given that savings are falling each year. Banks here have borrowed money from institutions in other European Union countries where growth is slower. The Bank of Spain says that this makes Spanish banks more susceptible to fluctuations in interest rates, which are currently at historic lows, but which are likely to rise in the future. "This imbalance between investment and financing in the private sector could well present challenges in the medium term for entities," the report says.

The Bank of Spain was also concerned about the overall lack of liquidity in the sector. The report measures the strength of banks' capital and reserves against its risk exposure. The Bank of Spain says that solvency fell in 2004, "which represents a continuation of the tendency over recent years. The sharp increase in banks' own resources has not compensated for the strong increase in requirements."

The central bank's solvency index was close to 11 percent and is now almost at 10 percent - the minimum requirement is 8 percent.