The Bank of Spain issued a warning on Monday, stating that bad loans could increase as a result of the economic impact of global geopolitical tensions, although growth in lending income for Spanish banks is anticipated to slow down in 2024 owing to a steady increase in deposit compensation. 

Financial Stability

The central bank encouraged lenders to set aside greater provisions to potentially bear future losses by using a portion of their higher profits, as stated in its semiannual report on financial stability.

Compared to their counterparts in the euro zone, Spanish banks, which mostly serve retail customers, typically profit more from higher interest rates.

Their improved earnings on home loans, which are mostly dependent on floating rates, helped to contain a 3.4% drop in total loans last year.

In February, average returns on one-year household savings at Spanish banks were 2.37%, whereas the euro zone average was 3.2%.

“Net interest income should be expected to moderate gradually as the pass-through of liability rates moves closer to that of asset rates,” the Bundesbank stated.

Under Pressure

The organization further stated that, in this context, a move from bank deposits to funds and government bonds in pursuit of more compensation may continue, as well as the substitution of low-yielding current account deposits with time deposits.

Net interest income, or revenues on loans less deposit expenses, increased by 22.4% in 2023. However, analysts predict that the benefits of loan repricing will wear off by the middle of the year.

The Spanish central bank stated that the real estate market in Spain has been reasonably tranquil in terms of prices and transactions, in contrast to nations like Germany and Sweden where the industry has been under pressure.

In Spain, the fourth quarter saw a 0.2% year-over-year increase in prices in this industry. Nevertheless, it was advised that, in order to identify any possible threats, the banks’ real estate exposure be closely monitored.