The two speeds of delinquency: few defaults in households and more trouble in leisure and hospitality

Since the pandemic, one of the metrics that receives the most attention is bank delinquency. They are a reliable thermometer to verify if the storm clouds that are looming really reach the real economy. For the moment, to the surprise of many, the alert has not sounded: the proportion of doubtful loans out of the total stood at 3.68% in November, according to the latest data from the Bank of Spain, at historically low levels. However, this figure hides two speeds: in families the default is even lower (3.24%), while in companies this rate is somewhat higher (4.43%). Defaults are much more relevant in the sectors hardest hit by the pandemic and the crisis derived from the war in Ukraine: leisure, hospitality and, to a lesser extent, construction.

The most relevant factor that explains why families have avoided the sinkhole of defaults is the strength of the labor market. That is, the default does not grow, nor will it grow strongly, while employment holds. This occurs because in Spain, traditionally, there is a preference for owning a home, which makes debtors more responsible in paying the mortgage loan. “It is surprising that despite the intensity of the covid crisis and the one that broke out with the war in Ukraine, the delinquency rate continues to fall. The strength of the recovery in 2022 and the measures adopted to cushion the impact of the crisis contribute to this. In the case of the domestic business in Spain, employment has resisted and that is good news so that family delinquency does not increase”, explains Joaquín Maudos, deputy director of the IVIE and professor at the University of Valencia.

In the case of companies, defaults depend more on the economic cycle than on employment. Historically, when activity has cooled, NPLs have risen. Hence the fear that existed with the blow of the pandemic. Recent precedents were not rosy: in the Great Recession, the default rate reached 13.6% in December 2013. For this reason, governments prepared for the worst and spared no effort in the form of public aid to avoid disaster. This bottle of oxygen, as well as the boost in the economy (it grew by 5.5%, according to the INE advanced this Friday), has helped doubtful loans to be contained for now.

But in this story there are also losers: the sectors linked to tourism (leisure and hospitality) or those dependent on raw materials, such as construction, according to Javier Santacruz, a researcher at the Spanish Institute of Analysts. “Symptoms are already seen in those most affected by the pandemic and the energy crisis,” he says.

According to data from the third quarter of last year from the European Banking Authority (EBA), artistic, recreational and entertainment activities registered a delinquency rate of 12.28% (two points below that of June for the good summer season); hospitality, 9.28%, and construction, 7.14%. “The slowdown in activity and how tourism behaves will be very important for the Spanish economy and for companies that are on the edge. It will also influence the ability they have to transfer to the final prices the increases in costs that they have had ”, advances Marta Alberni, consultant in the banking area of ​​International Financial Analysts (AFI).

There are badly damaged companies that would have a difficult time weathering new setbacks. Hence, they need the wind in favor of the economic cycle to be able to overcome difficulties. According to a Bank of America report, the possible difficulties faced by companies are not being correctly assessed. “The market continues to underestimate bankruptcy risks. Investors are really worried about the risks of recession, while taking the focus off defaults ”, he exposes.

These sectors are precisely the ones that bring together the most public aid, for example with the loans guaranteed by the Official Credit Institute (ICO). And this also explains that among the loans backed by the State, slightly more than a quarter of these are classified under special surveillance (20.2%) or doubtful (5.9%), in line with the European average. According to a recent report by the Bank of Spain, “the sectors most affected by the pandemic continued to present a higher proportion of problematic assets in September 2022, although this had shared the downward trend observed in the rest of the sectors.”

Sale of portfolios

The evolution of defaults is being very positive, much more than what was drawn a year ago, although there are other reasons that explain this more favorable performance. “When the doubtful ones are analyzed, there is a part of the drop in the rate that is explained by the sale of portfolios of the entities. There is a clear step in June 2022, before the presentation of first quarter results”, adds Alberni. Specifically, according to data from the Bank of Spain, last June the total balance fell by 2,847 million euros, when it went from a rate of 4.08% in May to 3.8% the following month.

Looking ahead to this year, the forecast is for non-performing loans to rise somewhat, although not at a worrying rate. César González-Bueno, CEO of Banco Sabadell, assured this Thursday that the entity’s doubtful debts will grow in the coming months, although he foresees that the rate will not exceed 4%. Maudos agrees with this vision in aggregate terms, with doubts about the evolution of European monetary policy: “Non-performing loans are expected to increase given a forecast of GDP growth in 2023 that is well below that of last year. The big question mark is the route that ECB interest rates will take. If the rise were intense, it would be bad news, since it would affect the payment capacity of families and companies.