OREANDA-NEWS. The latest Spain Fitch Fundamentals Index (FFI) highlights consumer lending as one of the drivers of new credit provision, Fitch Ratings says. We think competition between lenders could pose risks to performance if lending standards fell significantly, but favourable macroeconomic dynamics should keep performance stable in the near term.

Our 2Q16 aggregate index remained at '+4', indicating that credit conditions in the Spanish economy are still improving, although more slowly than in 2015. Continued strong growth in the New Credit Index (one of ten components) pushed it back up to '+10' (or 'Strongly Positive') in 2Q16, from '+5' ('Positive') in 1Q16.

New mortgage and consumer lending both grew, while new lending to SMEs contracted. As Fitch said last month in its 'Iberian Consumer Credit Market Review', the bounce-back in new consumer lending, which has posted double-digit annual growth in the last two years, is mostly due to rising demand as Spain recovers from its prolonged double-dip recession. GDP growth is the strongest among the large eurozone economies.

Spanish banks are competing for consumer lending market share as they seek to boost weak profitability. This will increase pressure on loan spreads although they will still be wide to reflect higher risk inherent in this type of lending. Origination increased in the early part of 2016 despite volatility in global financial markets and softening of Spanish confidence indicators although these remain robust. Further easing of credit standards coupled with strong rising demand would expose lenders to more vulnerable borrowers, especially if the economy slowed unexpectedly.

The Spain FFI tracks changes in credit fundamentals across key sectors of the Spanish economy. Analysing the relative strength or weakness of the index or its sub-components can provide insight into whether conditions in Spain are conducive to economic growth.