Spain’s state-backed development bank says the recovery in the euro region’s fourth-biggest economy is now strong enough for the lender to shift its strategy to focus on quality rather than quantity.
“Volume won’t be as important in the next phase as it has been in the previous five years,” Roman Escolano, chairman of the Instituto de Credito Oficial, said in a March 7 interview in his office in Madrid. Its share of loans to companies of one year or more peaked at about 11 percent in 2013 and will now begin to shrink as banks’ ability to lend improves, he said.
Such progress in a country, which experienced the worst economic slump in its democratic history after the end of a real-estate boom sent its banks into a tailspin, showcases the achievements of the euro region in shaking off the legacy of its debt crisis. Escolano’s comments also chime with European Central Bank President Mario Draghi’s view that a decline in euro-area lending is easing and borrowing costs are falling in its most-troubled members.
“We think our share in lending has reached a maximum,” said Escolano, whose institution is Spain’s seventh-biggest lender with 102 billion euros ($141 billion) in assets. “The banks left from the banking restructuring are better capitalized and have an improved funding and lending capacity.”
Spanish bond yields have fallen since mid-2012, pushing 10-year borrowing costs to the lowest in eight years. The yield was at 3.32 percent today, compared with 4.76 percent a year ago.
ICO, created in 1971, was one of the main tools used by Prime Minister Mariano Rajoy to help companies and regions pull through a credit crunch and a drop in tax receipts while he requested a European bailout for the country’s banks. The funds it manages surged to 156 billion euros in 2013 from about 82 billion euros when he came to power at the end of 2011 as most large regions lost access to financial markets.
ICO itself borrowed 20 billion euros from the ECB, when the central bank offered loans with a maturity of three years at the end of 2011 and early 2012. It has repaid 1.2 billion euros of that amount, Escolano said.
As it steers away from extending emergency support, ICO is refocusing on helping those companies contributing to an export-led recovery with special loans and trade-finance guarantees, he said. It’s also investing in venture capital and cooperating with other European promotional banks.
ECB Executive Board member Yves Mersch has identified national development banks as one option to funnel credit to smaller companies by rekindling the market for asset-backed securities. He has encouraged them to “work closer together and become active across borders.”
ICO’s credit mainly reaches small and medium-sized companies, which represent more than 90 percent of Spanish enterprises, through commercial banks. New lending started to increase in the third quarter of last year and reached 1.8 billion euros in the first two months of 2014, Escolano said. That compares with new loans worth 2.4 billion euros in the first four months of 2013.
That suggests that the stock of loans will stabilize or increase from next year as old real-estate and construction loans are repaid, he said.
At the same time, banks from Banco Santander SA to state-rescued Bankia SA are starting to pare a 23 percent drop in lending over the last five years. New company loans of as much as 1 million euros for as long as a year reached 10.6 billion euros in January, up from 10.1 billion euros a year earlier, according to Bank of Spain data.
“Because of a mixture of better funding and an improved economic outlook, people are starting to invest,” Escolano said. “The mood has changed in the corporate sector. Fixed investment in buildings, machinery or transportation equipment will increase this year for the first time since 2008.”
ICO’s capital-risk fund, created in 2013, will invest about 600 million euros this year in three rounds of tenders after spending 189 million euros last year, he said. It may lay out more than the planned 1.2 billion euros through 2017, depending on demand, as products will be diversified, he said.
“Our immediate concern was to set up a defibrillator to revitalize the Spanish capital market,” Escolano said. “Now the market is reviving, we won’t stick to venture capital and development, we’ll do mezzanine funds, debt funds and specialized funds.”
ICO, which has sold bonds worth almost a fifth of its 10 billion-euro maximum goal for 2014, is benefiting from increasing confidence in Spain. The bank is considering a third benchmark of at least 500 million euros, he said, adding that the bulk of issuance will have maturities of two or three years, in line with the duration of its liabilities.
While ICO has no plans to offer inflation-linked securities this year, it’ll increase the issuance of foreign-currency bonds with a short-term priority for yen, dollars and pounds, Escolano said. ICO issued about 278 million euros of such bonds in 2013.
“We’re coming back to the flexible, multicurrency approach that used to be the norm for ICO before 2009,” he said.