Spanish banks' bad loan ratio dropped in December for the first time in close to two years, helped by the government's launch of a so-called 'bad bank' at the end of 2012 to manage toxic real estate assets from ailing lenders.
The bad bank, known by its Spanish acronym Sareb, took on 37 billion euros ($49.4 billion) of assets, including soured loans to property developers, from four nationalised banks in December, as part of a broader clean-up of the financial sector.
Those assets transfers took credit out of the banking system and pushed Spanish banks' bad loan ratio down to 10.4 percent of their oustanding portfolios, from a record high of 11.4 percent reached in November of last year, according to Bank of Spain data.
Spanish banks' bad loan ratio has been steadily climbing for months, after a property boom ended five years ago, saddling banks with problem loans and bankrupt clients. The last time the ratio dipped slightly was in March 2011.
Spain had to ask Europe for 40 billion euros last year to help its weakest banks, and the country set up Sareb as a condition of receiving the aid.
Although December's figures look better, banks have also warned that the ratio, based on loans in arrears for 90 days or more, could continue to climb in 2013. Spain's economy is not expected to grow again until 2014 and unemployment is at a record 26 percent.
"The bad loans ratio will continue to rise for at least two or three more months," said Alejandro Ruyra, financial sector analyst with Kepler Capital Markets.
Credit in the banking system dropped by nearly 80 billion euros in December, because while Sareb took on the assets from banks at steep discounts, their face value on lenders' books was much higher.
"There is a drop in loan balances, which, for the main part, does not correspond to any drop in the flow of credit to families and Spanish companies," the Bank of Spain said in a statement.
Non-performing loans dropped by just over 24 billion euros to 167.4 billion euros.
Sareb is set to receive another 15 billion euros in assets from four other banks by the end of February, which could further influence the system's bad loan ratio. ($1 = 0.7490 euros)
(Reporting by Sarah White and Jesus Aguado, Editing by Fiona Ortiz)