While non-performing loans (NPL) among banks in Spain is close to an all-time high at 11 percent, the real number is closer to 17 percent, a study from Exane BNP Paribas SA (EPA:BNP) (OTCMKTS:BNPQY) finds. The use of restructured loans and foreclosures skew NPL reporting to make the situation appear less dire than it really is.

Also see Spanish Banks Lose Half of All Profits Since 1992 In Less Than Two Years

Spain’s non-performing loans (NPL) ratio

Spain’s NPL ratio has grown 22 out of the last 24 months, the only two exceptions being December 2012 and February 2013, when four banks transferred assets to Sareb (Sociedad de Gestión de Activos procedentes de la Reestructuración Bancaria), the so-called ‘bad bank’. Since Sareb is not considered to be an actual bank under Spanish law, even though it functions like a bank, this allows the Spanish financial sector to effectively write down the amount of toxic assets burdening the economy.

Spain NPL sequential

Bad banks in Spain

“The NPL ratio of the Spanish financial system deteriorated once again in May 2013 by 33bp m/m to 11.21 percent, not very far from the all-time high in spite of the bad bank,” says the report. “Were we to include part of the restructured loans and foreclosed assets the ‘real’ NPL ratio might already be approaching 17 percent, according to our estimates.”

In addition to the Spanish NPLs that are now held by Sareb, and technically not part of the banking sector, Exane analysts found two other reasons to consider the effective rate of NPLs to be higher than the official statistic. First, €126 billion in restructured loans as a group are not being counted as NPLs, even though many of them had been NPLs. The report says that it’s reasonable to assume that 30 percent of those loans will prove to be non-performing, raising the bulk of non-performing loans by €38 billion. Second, some assets were foreclosed on expressly to prevent them from showing up as NPLs.

“Putting all the different concepts together, we believe that the most accurate figure reflecting the total stock of NPLs in Spain approaches €275 billion (or $363 billion using the current exchange rate) for a potential NPL ratio approaching 17 percent,” says the report. To put that in context, Spain has a GDP of slightly less than $1.5 trillion, which means NPLs make up over 25 percent of GDP.

Spain NPL ratio

Spain’s banking system has taken a beating over the last two years, with half of its profits over the last two decades disappearing in less than two years. The ratio of Spanish NPLs continues to increase in the context of shrinking total loan book and low demand for credit. High unemployment and ongoing de-leveraging make it unlikely that the Spanish banking sector will return to high growth in the short or medium term.