Barclays: banks would bear a 30% default in sectors damaged by Covid

Barclays estimates that Spanish banks could bear a default rate of 30% in the sectors most affected by the coronavirus crisis.

The entity sees it “unlikely” that the Government will implement direct aid to companies through debt relief, while it considers it more effective to inject capital into them. This is shown in a recent report that analyzes Spanish bank loans to the business sector to assess the impact of a potential deterioration in asset quality.

Regarding the direct aid to companies that the Spanish Government is studying, Barclays sees it as “very unlikely” that debt relief will be carried out in the loans guaranteed by the ICO, although it could be covered with amounts already provisioned in 2020.

As he explained, a debt cancellation would involve not only banks, but other providers. Furthermore, it would have to be structured as a law (with the necessary backing from Congress) and would involve direct negotiation between a borrower and a lender, which would constitute a private renegotiation that would be “very difficult to justify and impose by the government.”

In this regard, the entity believes that there are considerable risks, such as an increase in provisions and that the renegotiation could trigger legal action against the Government for the losses suffered by the banks.

On the other hand, a direct capital injection to companies would provide relief without challenging Spanish law and could facilitate an orderly renegotiation between banks and borrowers, according to Barclays, which argues that it would be “more advantageous” if these aid were not They will limit the companies that have received ICO credits.

“We believe this would be the best option because it would provide direct relief and would not trigger additional provisions that could restrict credit, as could be the case with other alternatives.

IMPACT LIMITED BY EXPOSURE TO SECTORS MOST AFFECTED

Barclays concludes that the risk of the credit quality of assets in the corporate debt component is “limited” and that entities can absorb a 30% rate of defaults on corporate debt in the sectors most affected by the Covid-19 crisis. 19.

“We believe that Spanish banks could withstand a default rate of 30% in the sectors most affected by the current Covid-19 crisis. We see that Spanish companies are in better shape than during the previous crisis and we think that, in the case from a faster reopening, the delinquency rate could improve, “the report said.

After provisions absorbed a 30% non-payment rate in the most impacted sectors and the rest of the portfolio of companies, the entities would maintain a cushion of “excess forecast provisions”, which would be higher in the case of Sabadell and Santander and lower for BBVA.

LIMITED BULLISH POTENTIAL FOR BBVA

In its report, Barclays has also revised the valuation for BBVA, whose upside potential is “limited”, downgrading its rating from ‘overweight’ to ‘hold’, while maintaining the recommendation of ‘overweight’ Santander and CaixaBank and ‘hold’ Bankia, Sabadell and ‘Bankinter’.

BBVA is trading “slightly above” the target price given by Barclays (4.40 euros, compared to 4.30 euros previously), after its bullish streak since the beginning of April 2020.

“We remain constructive, particularly given the excess capital that should provide multiple options in the future, but we downgrade the rating as we do not see a clear short-term catalyst in the announced buyback,” he says in his report.

According to Barclays, the biggest risk to bank valuations is the possibility that restrictions due to the coronavirus will remain and the reopening will be delayed even further, which would reduce forecasts for economic growth.

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