Growth in Spanish banks' lending income is expected to slow down in 2024 due to a gradual increase in deposit remuneration, while bad loans could rise due to the economic impact of global geopolitical tensions, the Bank of Spain warned on Monday.

In its semiannual financial stability report, the central bank urged lenders to use part of higher profits to set aside more provisions to potentially absorb future losses.

Spanish banks, which are mainly retail lenders, tend to benefit more from higher interest rates than their euro zone peers. They have had higher returns on mortgage loans, largely tied to floating rates, offseting a 3.4% decline in overall loans last year while keeping a lid on rates for savers.

As of February, Spanish banks offered an average return on one-year household deposits of 2.37%, compared to 3.2% in the euro zone 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 said.

In this context, the institution also said that the replacement of low-yielding current account deposits with time deposits may continue, as well as a shift from bank deposits to funds and government bonds in search of higher remuneration.

In 2023, net interest income, or earnings on loans minus deposit costs, rose 22.4%, and analysts expect the positive effect from loan repricing to fade around mid-year.

Unlike countries such as Germany and Sweden, where the real estate sector has come under pressure, the Spanish central bank said the sector in Spain remained relatively calm in terms of prices and transactions. Prices in this sector in Spain rose 0.2% year-on-year in the fourth quarter.

Still, it recommended that the monitoring of banks' real estate exposure be reinforced to detect any potential risks.

(Reporting by Jesús Aguado, editing by Andrei Khalip)