The banking sector strikes back: mortgage loans increase after the ruling of the CJEU
Spanish banks will increase credit to cope with a Euribor still at record lows and the CJEU ruling on floor clauses.
Spanish banking has been in crisis for a number of years in the context of a low-margin and narrow-margin banking environment, to which two new factors have been added: the recent CJEU ruling on floor clauses, which would have an impact of 4,000 million Euros on the accounts of the Spanish financial sector; and the minimum Euribor rates, which are expected to bottom out at least during the first half of 2017.
With this scenario, the Spanish banking sector has developed a commercial strategy for this new year: to increase the new mortgage loans and rely on the growth of the mortgage credit balance, while still committing to offer fixed-term mortgages instead of variable ones.
Indeed, the balance exceeded the figure of 667,000 million Euros in 2016 and, for the first time since 2010, the number of new bank loans for the purchase of housing could surpass the total of amortised mortgages.
The sentence of the floor clauses, by which banks are obliged to refund their customers the overpaid amounts for their mortgages, will accelerate the tendency of the banks to opt for variable term mortgages, which do not contain such clauses, are not affected by the Euribor falls, and are more profitable than fixed-term mortgages.
However, in Spain 71.4% of the mortgages are still of variable-term (in fact, the percentage of gross income each Spanish family would have to pay for the first year of their mortgage is 21.5%). For this reason, banks will offset the strong economic impact of the floor clauses refunds with new revenues, such as raising their fees and increasing mortgage and consumer loans.
The mortgage market has begun to grow although it is still far from the pre-bubble figures. In 2016 the capital contracted in mortgages was 3,000 million Euros. This is the starting point for the banks to secure their growth and cope with the CJEU ruling. Nonetheless, playing against them banks currently have the low Euribor rate, which has been negative for eleven consecutive months.
The Euribor value was -0.080% at the end if 2016, when at the beginning of the year it was +0.042%, having started 2017 at -0.083%. Forecasts say that this year the Euribor will hit bottom, although it will rise again in the second half of the year. Estimations say that by the end of the year it could go back to positive (+ 0.05%) and by 2018 could reach + 0.15%.
Several experts have based these forecasts on three aspects: the recent US Fed rate raise, the latest measures by the ECB (which maintained the value of the rates and extended the debt buy-up program by six months), and the rebound of inflation in Europe.
It is important to emphasize that in the first half of 2017 the methodology for the Euribor calculation will be modified, and from then on it will be based on the actual operations and not on the estimates of the market, as done until now.
The ruling of the CJEU and the Euribor historical lows affect banks financially. The strategies of these entities, which are based on increasing the value of the loans and on boosting fixed-term mortgages to avoid Euribor drops, seek to have the client pay for the negative effects these events have for the banks, that is, the action of Justice and the consequences of the crisis.
Del Canto Chambers’ Editorial Board