Transfers to bad bank bring about cosmetic fall in loan defaults

Non-performing loans in the Spanish banking system fell at the end of last year for the first in close to two years as lenders started transferring toxic assets to the Sareb asset management fund, the so-called bad bank set up the government as part of efforts to clean up the country’s financial system.

According to figures released Monday by the Bank of Spain, the default rate last December declined to 10.34 percent from 11.40 the previous month, the first such fall since March 2011.

The figures are somewhat deceptive in that the decrease does not represent an improvement in the ability of companies and individuals to service their debt. Sareb is not classified as a financial institution and, as such, the bad loans on its books are not included in the calculations for the banking sector.

As the Bank of Spain explained in a press release accompanying the figures: “As was to be expected, the transfer of assets to Sareb, including doubtful loans relating to the real estate sector, has led to a significant decline in the total outstanding balance of doubtful loans on credit institutions’ aggregate balance in December.” The central bank said this balance fell to 167 billion euros in the last month of 2012 from 191 billion in November, a decline of 12 percent.

The so-called Group 1 banks -- those that were nationalized after falling foul of the beleaguered property sector, which include Bankia Catalunya Banc, NCG Bank and Banco de Valencia -- started transferring doubtful loans and property to Sareb at the end of last year.

“The rest of the banks saw an increase in defaults,” Reuters quoted Kepler Capital Markets analysts said. “The non-performing ratio will continue its upward trend for at least another two or three months.”

Total outstanding loans in the banking sector as a hole fell by 79.5 billion euros in December of last year to 1.6 trillion, the lowest figure since April 2007. “There has been a reduction in the stock of loans, which, on the whole, does not correspond to any reduction in the flow of credit Spanish households and firms,” the Bank of Spain’s press release said.

The government has borrowed some 40 billion euros from its European partners to recapitalize troubled lenders. Most of that will go to so-called Group 2 banks. Those classified as Group 2 banks also require state aid as a result of being unable to raise funding privately at reasonable rates. Group 2 lenders are due to transfer toxic assets to Sareb at the end of this month.