UPDATE 1-Bank of Spain urges lenders not to ease up on bad loan provisions

(Adds details and a quote from Bank of Spain official)

MADRID, April 29 (Reuters) - The Bank of Spain urged lenders on Thursday to increase provisions to cope with a potential rise in bad loans as the economy remained fragile because of the COVID-19 pandemic.

Provisions at Spanish banks rose by 8.7 billion euros ($10.5 billion) last year compared to 2019, but most were booked in the first half of 2020 and provisioning has eased up since then, the central bank said.

“Provisions for credit risk in the Spanish business were significant, but this effort should be maintained over time and even increased depending on the efficiency of the support measures and the evolution of the macroeconomic scenario,” the central bank said in its semi-annual financial stability report.

In the first three months of this year, Santander and Bankinter said they had not set aside any specific COVID-related provisions, suggesting they considered the worst impact of the pandemic to be over.

At the end of February, the ratio of bad loans at Spanish banks stood at 4.55% of total lending, still below the pre-pandemic 4.82% in February 2020.

But the central bank said there was “very likely” to be a “significant” increase in bad loans in coming quarters, adding that the non-performing loan (NPL) ratios could rise in coming months, especially in the most hard-hit areas of the economy.

“We are being cautious because there is still a lot of uncertainty about economic trends and measures being adopted and the impact they may have,” Angel Estrada, head of financial stability, regulation and resolution, told a news briefing.

NPLs at Spanish banks have been held in check so far largely thanks to measures such as state-backed loans worth hundreds of billions of euros launched in 2020 to support the economy.

The central bank also warned against the premature withdrawal of those state-backed measures.

Reporting by Jesús Aguado; Additional reporting by Emma Pinedo; Editing by Andrei Khalip and Edmund Blair