OREANDA-NEWS. Increasing competition for market share may pose risks to the performance of Iberian consumer credit assets if it leads banks to significantly ease lending standards, Fitch Ratings says. Favourable macroeconomic dynamics should support stable performance across all market segments for now, but looser lending standards are a medium-term downside risk.

New consumer credit has posted double-digit year-on-year growth in both Spain and Portugal in the last two years, after sharp contractions due to depressed demand and a tightening of underwriting standards following the financial crisis.

We think lending standards are still adequate, and that the bounce-back in new lending is mostly due to rising demand for credit as Spain and Portugal recover from prolonged double-dip recessions. But we see a risk that credit easing may become excessive against the backdrop of competitive pressures, with origination accelerating in 1Q16 despite weaker confidence indicators and global financial market uncertainty.

Iberian banks are competing for consumer lending market share to boost weak profitability outlooks. For example, auto credit grew more than 25% last year - with lending by Spanish banks rising faster than at captive auto lenders. Meanwhile unsecured consumer credit lending grew faster at banks that are making a strategic push into this market.

We do not expect loan performance to deteriorate as long as economic fundamentals are robust and underwriting standards remain adequate. Delinquency rates have stabilised or fallen and further GDP growth should support stable asset performance as unemployment drops and household disposable income rises, bolstered by mortgage deleveraging and low interest rates and oil prices.

But further easing of credit standards, coupled with strongly rising demand, exposes lenders to more vulnerable borrowers, creating risks to medium-term performance, particularly if there were an unexpected economic downturn.