STD Banco Santander, S.A. Sponsored Adr (Spain)

   (FROM THE WALL STREET JOURNAL 11/13/15) 
   By Jeannette Neumann 

MADRID -- Spain's economy is expanding but its banks' balance sheets aren't.

Spain is expected to grow more than 3% this year, faster than the U.S., Germany and most other advanced economies.

But the amount of loans on Spanish banks' balance sheets has remained flat or fallen during the past year, driving down a key measure of profitability and heightening investors' concerns about lenders' ability to generate income next year.

It wasn't supposed to be like this.

"At the beginning of the year, we expected that we were going to have loan growth this year," Jose Antonio Alvarez, chief executive of Banco Santander SA, told reporters on Oct. 29. "We expected more intense demand for credit. The economy is growing well, very well."

In hindsight, executives at Santander and other Spanish banks, as well as some analysts and investors, say they underestimated the depth of the recession from which Spain is emerging and a consequence known as deleveraging.

Some individuals and businesses in Spain are in fact borrowing millions of euros in new loans each quarter from banks, but others are paying off their existing debts at a faster pace. That deleveraging causes the total volume of loans on Spanish banks' balance sheets to drop.

Santander, the eurozone's largest lender by market share, had roughly the same amount of outstanding loans in Spain in the third quarter of this year as a year ago. Bankia SA, the country's biggest bailed-out bank, saw a decline. And if it weren't for their purchases of smaller Spanish banks, loan volumes at Banco Bilbao Vizcaya Argentaria SA's Spain unit and Caixabank SA would have fallen year on year, too. Even with the bank buying, each of those lenders saw a decline in loans in the third quarter compared with the second.

Spanish borrowers have a lot of debt to work through. A borrowing binge that helped finance a building frenzy came to a halt in 2008 and plunged the country into recession through mid-2013. The debt held by Spanish businesses and households is expected to be more than double the country's economic output until at least 2020, the International Monetary Fund said.

Bankers said last year they expected Spain's better-than-anticipated economic growth to ease the country's existing debt burden and encourage new investment and borrowing, expanding banks' loan books during 2015.

The drivers of Spain's economic expansion, however, throw light on why that hasn't happened.

While Spain's 3.1% anticipated growth rate this year is notable, the country is still playing catch-up after years of contraction, said Juan Ignacio Sanz, a professor at Spain's Esade business school. Spain's total output in euros is expected to exceed precrisis levels only in 2017, according to the IMF.

Although Spain's 21% unemployment rate remains among Europe's highest, it is decreasing. But many of those who do have jobs have seen their salaries slashed as Spanish companies cut costs to pay down debts or make their exports more competitive.

Such borrowers are focused on paying off the debts they have, not borrowing more, even at super low interest rates.

Some Spaniards now shun taking on any more debt "because they have the memory of how bad it was during the crisis," said Juan Jose Toribio, an economics professor at IESE business school in Madrid. "That had a more important impact than we thought."

(END) Dow Jones Newswires

November 13, 2015 02:47 ET (07:47 GMT)

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