By Peter OBIORA InvestAdvocate
Lagos (INVESTADVOCATE)-The International Monetary Fund (IMF) Monday said Spanish Banks will face profitability challenges in the coming years as lending and home prices continues to slide further.
This is coming on the heels of a fifth and final review of the country’s financial sector by the IMF and the European Commission (EC).
The IMF said despite the substantial progress and the recent stabilization of output in Spain, important challenges for the financial sector remain, as the economy continues to undergo a process of private-sector deleveraging and fiscal consolidation that can restrain the pace of recovery, with concomitant challenges for bank profitability.
According to the IMF, other uncertainties for the sector arise from unknowns regarding the methodology of the forthcoming European bank asset quality review and stress test, as well as the unwinding of the state’s ownership interest in intervened banks over the next few years.
‘’It will thus be crucial to maintain the reform momentum. Sustained efforts will help safeguard and build upon the program’s gains, while further enhancing banks’ ability to lend and support the nascent recovery’’ the IMF said.
The IMF advised that at the country’s level, priorities should be focused on continued pro-active monitoring and supervision, continuous efforts to ensure adequate provisioning and to help prepare banks for the forthcoming European tests.
‘’Efforts to ensure adequate provisioning will also foster asset disposal over time, helping to free space on banks’ balance sheets for new lending. Supervisors should also continue to encourage banks to build nominal capital—including by taking advantage of buoyant equity markets to boost share issuance, restraining cash dividends, and supporting profits through further efficiency gains—rather than relying on credit contraction to support capital ratios’’ the IMF said.
While at the Euro wide level, it was advised that priorities should be given to further progress on banking union and continued monetary policy support to help reduce financial fragmentation, ease credit conditions, and assist the recovery.
‘’Strong efforts along these lines could help generate a self-reinforcing and virtuous cycle of falling funding costs, higher profitability and capital, easier credit conditions for households and businesses, and more job creation, ‘’ the IMF affirmed.
