By Jeannette Neumann
MADRID--Spain's modest economic recovery hasn't reversed a slump
in the bread-and-butter business of its banks: loans.
Each of Spain's five big banks has seen total loan volumes fall
over the past 12 months through September. At the Spanish unit of
Banco Santander SA, the country's largest bank by market value, the
total dropped 5.1% during that period.
Banks across Europe are struggling to expand lending despite
efforts by authorities to cut the cost of borrowing and stoke
demand for loans in a region that hasn't moved full-throttle beyond
recent recessions. Investors, analysts and policy makers are
monitoring lending in Spain and across the eurozone for signs of a
healing economy.
Executives at Santander and other Spanish banks said they don't
expect total loan volumes to increase before late next year.
One hurdle to loan growth is unemployment and its effect on
mortgages, which make up a substantial portion of many banks'
loans. Mortgages account for 31% of Santander's loans and 43% at
Caixabank SA, the third-largest lender by market value.
The country's banks issued 19,323 home mortgages in September,
the peak month this year, a far cry from the record 129,128 in
September 2005, at the height of the building boom.
Then the boom went bust, as property developers began to default
on loans, pushing some regional savings banks toward collapse.
Spain borrowed about EUR41 billion ($50.8 billion) in European
Union funds in 2012 to bail out those troubled lenders.
Spain's unemployment rate has declined only modestly from its
26% level in mid-2013, when the economy emerged from its second
recession in five years. Even with the economy expected to expand
1.2% this year and 1.7% next year, according to the European
Commission, the unemployment rate is projected to be about 22% in
2016.
Some banks are shifting their focus to business loans, cutting
interest rates and attempting to attract new borrowers.
The volume of loans issued for less than EUR1 million, a proxy
for borrowing by small and medium-size businesses, increased 8.2%
in the first 10 months of this year compared with a year earlier,
according to Spain's central bank.
The competition to tap small and medium-size businesses, though,
makes it harder to turn a profit. Santander Chief Financial Officer
José Antonio Álvarez, speaking during the bank's
third-quarter-results presentation in November, said the bank was
under some pressure to lower borrowing rates for business
loans.
César Pontvianne, head of Plásticos Dúrex, a Salamanca-based
company that produces plastic car parts, said interest rates for a
roughly EUR500,000, two-year loan have dropped to about 3% compared
with about 5% a year ago.
"I'd never even heard from these banks before," Mr. Pontvianne
said, "and then, all of the sudden, they were on our doorstep."
Spanish banks "have lost a lot of clients. And a lot of mortgage
volume, " said Contenur SL Chief Executive Officer Iñigo Querejeta.
The company is based on the outskirts of Madrid and exports garbage
containers to 20 countries. Banks "are willing to lend money in
conditions we haven't seen for the last six or seven years."
At the same time, bank lending to bigger businesses is in
decline. The volume of loans over EUR1 million fell 21% in the
first 10 months of this year compared with the year-ago period.
That is partly because Spanish businesses have been able to issue
bonds, instead of relying on bank loans as they did during the
depths of the country's downturn, said Francisco Riquel, an analyst
with Madrid-based financial-services firm N+1 Group. That shows
investors have some confidence in Spain's recovery, but it means
banks are deprived of a source of profits, he said.
Even as the volume of new loans picks up in some areas, that
isn't enough to offset the pace at which borrowers pay down
existing debts. Santander's Spanish unit reported a 73% jump in new
mortgage issuance and a 34% rise in business loans in the first
nine months of 2014 compared with a year ago, even as overall loans
decreased.
"We still have a level of debt that's too high, especially among
businesses," said Jordi Fabregat, a finance professor at Esade
business school in Barcelona.
Big Spanish banks reported solid net profits in the third
quarter, but that was thanks in large part to gains in bond
trading, a volatile source of income.
Lenders will have to compensate for lower loan volumes by
continuing to close offices, cut staff and pay less to depositors,
Mr. Fabregat said.
Some analysts and investors said the pressure to increase
lending could have a negative effect on credit quality.
"Experience shows that when there's tough competition for
assets, to give credit in this case, and quickly, banks tend to
relax their risk analysis," said Juan José Toribio, an economics
professor at IESE business school in Madrid and a former head of
financial policy in Spain's Finance Ministry.
"Having liquidity doesn't mean I'm going to give a bad loan,"
Caixabank CEO Gonzalo Gortázar said during a third-quarter earnings
presentation. "If they don't pay back the loan, I've done a bad
deal."
Banks trying to boost loan volumes are likely to start targeting
smaller companies, analysts and economists said. Nearly 90% of
businesses in Spain have fewer than nine employees, according to
the Organization for Economic Cooperation and Development.
An increase in loans to these companies could help sustain
Spain's recovery, Mr. Toribio said.
But as a whole they are considered riskier clients, in part
because they have less financial cushion against potential
losses.
Write to Jeannette Neumann at jeannette.neumann@wsj.com
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