Spain’s banks and their regulators are become increasingly concerned about stiffening competition in the lending market and the damaging impact it is having on fragile profitability.
The Bank of Spain stepped in to halt aggressive competition for deposits four years ago at the height of banks’ rush to secure liquid funding from customers.
Now, according to bankers, regulators have sharpened their focus on two areas of lending — credit to SMEs and mortgages. Regulators were still in “watching” mode rather than “worried” mode, one person familiar with the matter said. But if margins in SME lending continued to decline that could change.
“Spaniards right now have the cheapest mortgages in the world,” said one senior Madrid-based banker, pointing out that lenders were now offering mortgages with a yield of just 1 per cent. “We are very profit-minded. We don’t like these kinds of price wars.”
Bankia, Spain’s fourth-largest bank, has stepped up efforts to win SME custom from the likes of Santander and BBVA, the top two lenders. They in turn are going after the retail customers of the smaller operators. “The former savings banks [like Bankia] want more market share in corporate banking, and the bigger banks want more market share in the mass market,” another senior Spanish banker said.
The market, he added, was “extremely competitive”, raising concerns among regulators that margins may eventually fall too far. “The main concern for the regulator is profitability, and especially the profitability of the weaker players.”
Santiago López, bank analyst at Exane BNP Paribas, warned in a research report last week that Spanish banks are falling back into “old habits”. He cited the availability of 0 per cent consumer loans and the return of mortgages with a loan-to-value ratio of more than 80 per cent as worrying signs that “addictions are notoriously hard to beat”.
The lament among bankers about the fierce levels of competition reflects — at least in part — the strong recovery of the Spanish economy. After Spain’s 2012 financial crisis and banking bailout, the country’s over-extended financial sector faced intense pressure to cut its loan book — sparking complaints from small business owners in particular about the lack of access to credit.
But with the banking system now on a sounder footing and the broader economy growing at more than 3 per cent, such concerns have given way to a different worry altogether: fierce competition and record-low interest rates that translate into wafer-thin profits.
In its latest financial stability report, the Bank of Spain warned that the “spread between lending and deposit rates in domestic business is at a level close to historical lows”. The current interest rate environment, it added, created “additional challenges [for banks] such as the maintenance of prudent management in the extension of credit at rates that compensate sufficiently the risk incurred”.