Albir Beach in Alfaz del Pi, Alicante, Spain, on Sept. 11, 2021. Spain's tourism industry was hit hard by the COVID-19 pandemic.
Source: Cristina Arias/Cover via Getty Images
Spanish banks' optimism about the impact of the EU's €800 billion coronavirus support fund on their profits could be waning as concerns mount about its distribution and take-up.
Lenders have been enthusiastic about the potential impact of the fund on the economy and bank lending, with Banco de Sabadell SA forecasting a €12 billion boost to its business lending volumes between 2021 and 2026. CaixaBank SA has described the fund a "golden opportunity for the Spanish economy."
The Next Generation fund is designed to boost the recovery of European Union economies from the COVID-19 pandemic.
"A big delay in the practical applications of the funds is generating less confidence in the short- and medium-term effects on the economy, and also for Spanish banking," Javier Santacruz Cano, economist and professor at Madrid's Instituto de Estudios Bursátiles, said in an interview.
"For the banks' [profit and loss statements], the expectation was greater, but now it is clearly lower."
The European Commission unveiled the fund in May 2020 to help the EU's 27 member states navigate the pandemic. The fund's centerpiece, the Recovery and Resilience Facility, consists of €338 billion of grants and €385.5 billion of loans. Spain qualified for the largest share of the fund — €69.5 billion in grants and €70 billion in loans — due to the severe impact the pandemic had on its GDP and unemployment.
The funds will generate growth in Spain, said Santacruz Cano, but he believes an opportunity was missed in Spain's proposal for funding to the EU to create changes to its economy that would have a lasting impact on the country and its lenders.
"Obviously, the effect is positive," Santacruz Cano said. "But it is more in the short-term than in the medium- and long-term, and that could have been better to establish new sources of profit and value creation for Spanish banks."
One of the major concerns around the effectiveness of the fund is the €70 billion loan component, which is unlikely to be fully utilized.
"A lot of countries have been reluctant to take up the loans" said Jessica Hinds, European economist at Capital Economics, who added that other financing options are currently more attractive due to record low interest rates and the NextGenerationEU grants are sufficient to meet current needs.
Sabadell told S&P Global Market Intelligence in an emailed statement that it is "not a bold assumption but the most plausible scenario" that Spain will request the full loan component of the funds available, highlighting Italy's request for its full allocation of loans. Spain's failure to fully use the funds, including the loan component, would mean "a major opportunity to advance European financial integration will be missed," it added.
Miguel Cardoso, head economist for Spain at BBVA Research, said ideally the Spanish government would use 100% of the resources made available to them by the EU, including the loans.
"Nonetheless, for this strategy to be successful, reforms would need to be ambitious, and a medium-term plan to lower the public deficit should be in place."
Santander said in an emailed statement that Spain's banks are working with the government to ensure that the funding reaches small and medium-sized enterprises and individuals. "Public-private collaboration is more necessary than ever in the successful implementation of Next Generation funds," it added.
Unicaja, Spain's fifth-largest bank by total assets, said that the correct implementation of the EU's fund could boost growth and favor "a more diversified production model" toward "innovation, technology and knowledge."
CaixaBank declined to comment.
Concerns exist about the Spanish economy's leverage should the €70 billion in EU loans be utilized and over any further lending from the multiplier effect the stimulus package would likely prompt. Spain's economy has only recently recovered from the impact of the global financial crisis.
Marisa Mazo Fajardo, banking analyst at Spanish investment firm GVC Gaesco, said some forecasts that put private lending generated by the fund at €180 billion over the coming years made her feel "uncomfortable."
"Why? Because that will be higher than the European average in terms of corporate lending and Spain suffered a lot from over-leverage," Mazo Fajardo said.
Spain's political structure, where power is highly devolved to regional governments, could also cause significant delays to the distribution and implementation of the funding due to "political arguing and fighting," said Hinds.
Spain used just 34% of the structural funds allocated by the EU for the 2014-2020 period, according to a CaixaBank Research report. "The track record of Spain spending EU money is not great," said Hinds.
Issues around human capital also raise questions about "how all this money can find enough borrowers to be disbursed," said Stefan Nedialkov, director at Citigroup Global Markets who covers the Spanish banking sector as an analyst. "Spain has one of the lowest higher education levels in the EU," Nedialkov said. "The productivity of the labor force is not as great as in other Western European countries. Innovation [which is one of the targets of the funding] is decent, but it's not Spain's strongest point."
Still, the €70 billion in EU grants alone represents around 5% of Spain's GDP, Hinds said.