Spanish companies are better prepared now to cope with COVID-19-Bank of Spain

MADRID (Reuters) - Spanish companies are better prepared to face the disruption from the coronavirus pandemic than when the global financial crisis hit, although some vulnerabilities persist, the Bank of Spain governor said on Monday.

Spain’s central bank said in its financial stability report that risks to global financial stability had increased but measures taken at national and European should help mitigate them.

“Spanish households and non-financial companies are facing this situation with a significantly more favourable financial position than before the global financial crisis,” Bank of Spain governor Pablo Hernandez de Cos said in a separate statement commenting on the central bank’s report.

De Cos, who is also a member of the European Central Bank governing council, said the better relative positive position of Spanish companies was mainly a result of the substantial reduction of their debt in recent years, which is now below the European average.

However, the Bank of Spain said the contraction of the economy in the second quarter would be significantly higher than in the previous quarter, when it showed a quarterly record decrease of 5.2%.

The Bank of Spain also said that the COVID-19 pandemic had lead to an increase of the cost of risk - or the cost of insuring a loan - in banks’ exposures to companies. The challenges for lenders were significant due to the magnitude of the shock in the short-term.

Against this backdrop, the Bank of Spain said that despite the significant reduction in bad loans since 2014, the non-performing loans ratio was still above pre-crisis levels and would experience an increase thus further eroding the bank’s already battered profitability ratios.

At end-February, Spanish bank’s non-performing loan stood at 4.79% while at its peak in December of 2013 it surpassed 13.5%, with a return on equity (ROE) - a measure of profitability - declining to 7.1% at end-2019 from 8.3% at end-2018.

Spanish banks, which are also suffering the effects on their financial margins from ultra-low interest rates which are expected to remain lower for longer, according to De Cos, also face increased litigation risks related to their loan book.

The central bank also warned of a “significant impact” on the Spanish real estate sector, at least in the short term, and said a future recovery would depend on how long the economic effects from the current pandemic shock would last.

Reporting By Jesús Aguado and Emma Pinedo; editing by Sonya Dowsett and Angus MacSwan