* Spanish banks' stock of bad loans starting to drop
* Tough provisioning has helped banks cut ratio
* Not expected to boost earnings in the near term
* Drop unlikely to accelerate, due to fragile economy, ECB
By Sarah White
MADRID, April 30 Bad debts at Spanish banks are
falling compared with overall lending for the first time since
the financial crisis, signalling the start of a slow return to
normality for a sector once viewed as a trip wire for the
Spanish economy and wider euro zone.
Spain's banks were forced by the central bank and the
government to set aside billions of euros in provisions in 2012
and 2013 for soured property loans after years of denial about
the size of their problem. Now they are starting to reap the
benefits of that harsh medicine.
Most of Spain's major lenders, including Santander
and BBVA, cut their stock of domestic bad debts in the
first quarter compared with the end of last year. Their high
level of provisions made it easier for them to write off some
soured loans and move them off their balance sheets.
Some lenders even reported declines in the ratio of bad
loans to their total credit as a decline in lending slowed.
Barcelona-based Caixabank said its bad-loan ratio fell
in the first three months of 2013, the first decline in six
Bad loans as a proportion of overall credit dropped to 13.5
percent and 13.4 percent in January and February from a peak of
13.6 at the end of last year.
Analysts said this was the start of a turnaround that should
leave lenders much better off. Many Spanish banks had been
suspected for years of rolling over loans to ailing companies to
keep them going and avoid pain. They were forced to address this
problem last year, when the Bank of Spain made them treat
refinanced loans more harshly.
"A great deal of the refinanced debts have been reclassified
as non-performing and have been recognized," said Carlos
Peixoto, a banking analyst at BPI. "It's still something we look
at, but it has stopped being a risk."
A tentative return to economic growth last year has helped
reduce Spanish bad-debt ratios, but the main driver has been
their own clean-up operation.
"On the one hand, new entries of bad debts are falling, only
a little, but they are falling month by month," Juan Maria Nin,
chief executive of Caixabank, told a news conference last week.
"Channelling out the failed loans is helping," he added,
referring to written-off debts being taken off balance sheet.
In a note this week, rating agency Standard & Poor's said
Spain's banks had absorbed most of their credit losses, and with
economic activity starting to pick up and real estate prices
expected to bottom out this year, the economic risks facing
Spanish banks had eased.
"We therefore expect banks' credit provisions to decline
in 2014 and 2015 and to approach more-normalized levels by
2016," S&P said.
However, the Spanish economy is still hamstrung by sky-high
unemployment, and banks are preparing for stress tested by the
European Central Bank (ECB) this year. Bankers and analysts do
not expect the first quarter drop-off in bad-loan ratios to
accelerate this year.
"It will be a mixed year, and perhaps we will not see falls
of the same magnitude next quarter," said Peixoto at BPI. "But
the long-term trend is there, for this year and the next."
Many debt-laden companies still need to be restructured or
are trying to cut borrowings, meaning the cycle of losses and
write-offs is not yet over.
Some of Spain's banks were also still putting up buffers
against bad loans in the first quarter, as they prepare for the
ECB health checks this year. That could delay any benefit they
may feel from falling bad debts on their earnings.
Bankia, Spain's biggest bailed-out bank, posted a
lower bad-debt ratio in March compared with December, and said
it had shaved 842 million euros off its bad-debt stock in the
period, after selling a 300 million-euro portfolio of failed
loans. But the lender nearly tripled net provisions in the first
quarter, to 47 million euros from a year ago.
"We are still strengthening the bank more in terms of
provisions," said Jose Sevilla, director general at Bankia. "We
will probably see something similar next quarter."
(Writing by Carmel Crimmins; Editing by Larry King)