Position of the Spanish financial sector in a more complex macro scenario

Speech by the Governor of the Banco de España (BdE) analysing the position of the Spanish banking sector in view of the risks of economic downturn on a global scale, in a very complex macro-financial situation, characterised by high inflation, tighter financing conditions and increased uncertainty. Although the starting point of the banking sector is positive, the Governor recommends banks to be prudent and have a very careful provisioning policy and capital planning in the coming quarters.

Key highlights of the speech:

• The starting point for institutions is sound and the financial position of individuals and companies is better than it was during the financial crisis:

- The NPL ratio of bank loans to the resident private sector in Spain has fallen to 3.8 % in June 2022, returning to record lows after the global financial crisis. 

- The profitability ratio of Spanish Banks stood at 10% in the first half of the year, above the cost of capital (7% according to BdE estimates) while the solvency ratio (CTE1) stood at 12.9% in June 2022, 70 bps above the pre-pandemic level (12.2%).

- The financial position of the private sector has improved. The weight of household and corporate debt to GDP stood at 150.4%, slightly below the European average and 76 points below the peak reached in June 2010.

• Effects of raising interest rates: A 300 bp increase, in line with that observed so far, would increase the proportion of households with a high debt burden by 3.9 pp to 13.8% of the population. In the case of corporates, those that would become highly financially burdened after the rate hike would account for 10.7% of employment (9.1% before the rate hike). 

In any case, the governor points out that the current macro-financial environment will increase the financial vulnerability of households, corporates and the public sector and will imply a downward adjustment of both their consumption decisions and their investment in housing.