Funcas warns of an increase in delinquencies between the end of 2022 and the beginning of 2023 due to the pandemic

Funcas believes that banks would still have to make provisions worth 12,000 million euros in the income statements for 2021 and 2022 due to the impact of the coronavirus crisis, and foresees an increase in doubtful credit between the end of 2022 and the beginning of 2023 before the increase in delinquency. This is one of the conclusions collected in the article ‘Asynchrony between delinquencies and provisions in the banking sector’ published in his latest Economic Information Notebook.

Specifically, Funcas estimates that the “high point” of the bad credit It is reached between the end of 2022 and the beginning of 2023, with a subsequent recovery, so that the default will be close to, but slightly above, pre-pandemic levels in 2024.

Furthermore, it foresees that the growth of doubtful credit will be about 40 billion euros between 2021 and 2022.

For its part, mortgage credit would be the least impacted according to the forecasts of the authors of the article, registering a more contained rise after the end of the temporary employment regulation files (ERTE), a measure that they consider that so far has been effective in containing the flow of defaults.

However, Funcas foresees that the greatest impact in absolute terms will occur in the business segment, although with disparity by sector and by geography. In this sense, the Funcas analysis center expects a particularly significant increase in the default rate in those sectors most vulnerable to the pandemic, such as hospitality, leisure or transport, while in sectors with less exposure to the effects of COVID-19, it foresees slight increases or even decreases.

Increase in bad debts

Also, in the same article, Funcas points out that given the increase in impairments attributable to the effect of the pandemic, of about 40,000 million euros, and assuming an average coverage rate of 60%, banks would still have to provision “in the total horizon of three years”, including the 2020, around € 24 billion.

The Savings Banks Foundation points out that the «important» effort to clean up credit carried out in 2020 by Spanish banks represents, however, the early recognition of approximately half, 47% of these losses associated with the upturn in the delinquency.

«As a consequence, and according to our estimates of delinquency, the Spanish entities would still have pending the recognition of something more than 12,000 million euros of credit impairments in the income statement for 2021 and 2022 ».

However, with respect to the data of the Spanish banking sector for the first quarter of the year, Funcas points out that the provisions made in that period «Show a notable slowdown» compared to those carried out in 2020, although levels higher than those of 2019 were maintained.

The provisioning effort for the first quarter would be equivalent, if maintained in 2021, “to a third of what is pending provisioning after what was done in 2020,” says Funcas, who considers that with this rate “the complete digestion of the effects of the pandemic it would be delayed until the end of 2023, a horizon that may be considered somewhat lax by the supervisor taking into account the recent messages sent by the supervisor.

Bank profitability

In terms of impact on return on equity (ROE) For the sector as a whole, Funcas estimates that the difference between two or three years “of digestion” is equivalent to one percentage point of ROE in the results of the current year.

In any case, it indicates that the results will be “Far superior” to those of 2020, which registered around 1.5% for the entire Spanish banking sector without taking into account the deterioration of goodwill abroad, which led to negative territory the profitability of the past year.