October 31, 2019 / 5:10 PM / 12 days ago

Bank of Spain warns of litigation risks in credit card business

MADRID (Reuters) - Spanish banks could face a rise in legal claims related to consumer lending activities such as revolving credit, adding to risks faced by the financial sector that stem largely from global and European trends, the Bank of Spain said on Thursday.

In its semi-annual financial stability report, the central bank said it registered a significant surge in claims last year related to the terms set in revolving credit card contracts, in particular where payments are split and delayed.

“This suggests a potential increase in litigations in this segment of the banking business,” it said, without giving an estimate of the potential costs for the sector.

It also said that the overall risk assessment of the country’s banks has deteriorated in the first six months of 2019 due to downward revisions to the general global economic outlook.

An aggressive push by banks into consumer lending has raised concerns over a possible return to the kind of lucrative but risky practices that tipped Spain’s financial system and economy into crisis a decade ago.

Although new consumer lending has recently cooled off, it has risen by over 60% between the end of 2014 and the second quarter of 2019, while mortgage lending has fallen 11.5% in the same period.

Consumer loans of 95 billion euros ($106 billion) account for just around 5% of total bank lending, but Spanish banks are turning increasingly to this type of business to improve lending margins and profitability.

Revolving credit, which is part of the consumer lending business, does not have a fixed number of payments, in contrast to installment credit.

New credit card transactions carry yields of close to 19.7%, while new mortgage loans hover at around 1.9%, according to data from the Bank of Spain from September.

Though the Bank of Spain does not give a separate breakdown just for revolving credit volumes, new credit and revolving cards lines amounted to 12.8 billion euros as of September.

The risks highlighted by the Bank of Spain in this segment of the business comes on top of previously flagged litigations risks by the Bank of Spain related to an historic method for pricing mortgages that could have a big impact on banks’ profits

Like other European banks, Spanish lenders are grappling with the consequences of the European Central Bank’s decision last month to cut its key deposit rate further into negative territory that further undermined profits from their traditional lending business.

In the medium term, the Bank of Spain said that the extension of ultra-low interest rates posed challenges for the financial stability.

Spanish banks suffered a drop in their profitability ratios of 1 percentage point in the first six months of 2019 to 6.6%.

It also said that banks’ profitability could come under additional pressure due to a slowing economy and if lower or negative interest rates stay in place for longer than expected. The Spanish economy grew 0.4% in the third quarter.

In this context, it said macro and microprudential authorities “should closely monitor the behavior of banks and other financial intermediaries to potentially halt excessive risk-taking.”

Reporting By Jesús Aguado, editing by Andrei Khalip and Jane Merriman

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