Growth in the lending income of Spanish banks is forecast to decelerate this year due to a gradual rise in deposit remuneration, whilst bad loans could increase due to the impact of global geopolitical tensions on the economy, according to the Bank of Spain on Monday.

Within its semi-annual financial stability report, the central bank encouraged lenders to allocate a portion of their increased profits towards bolstering provisions, which could help absorb potential future losses.

Spanish banks, primarily retail lenders, are positioned to gain more from higher interest rates compared to their counterparts in the eurozone. This advantage stems from their higher returns on mortgage loans, which are primarily linked to floating rates. Despite experiencing a 3.4% decline in overall loans last year, Spanish banks have managed to maintain low-interest rates for savers, Reuters reports.

Banks in Spain offered an average return on one-year household deposits of 2.37% as of February, compared to 3.2% in the eurozone as a whole.

"Net interest income should be expected to moderate gradually as the pass-through of liability rates moves closer to that of asset rates," the central bank stated.

In this context, the institution also highlighted the potential continuation of the trend where low-yielding current account deposits are replaced by time deposits. Additionally, there may be a shift from bank deposits to funds and government bonds as individuals seek higher returns.

Last year, net interest income, or earnings on loans minus deposit costs, increased 22.4%, the Reuters report adds, and analysts anticipate that the positive impact from loan repricing will diminish around mid-year.

In contrast to countries like Germany and Sweden, where the real estate sector has faced pressure, the Spanish central bank noted that the sector in Spain has remained relatively stable in terms of both prices and transactions. In Q4, prices in the Spanish real estate sector experienced a modest year-on-year increase of 0.2%.

Nevertheless, it recommended strengthening the monitoring of banks' exposure to the real estate sector to identify and address any potential risks.