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Western EuropeJuly 1 2015

Spanish lenders transition from stability back to growth

The Spanish economy's recovery is benefiting the country's banks, which are reporting increased profits and ambitious plans for growth.
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Spanish lenders transition from stability back to growth

If the financial services industry can be considered a microcosm of a country’s economy, the indications are that Spain’s banks are in for a good run.

“Spain’s economy is benefiting from the reforms that have been introduced. We expect to see gross domestic product [GDP] growth of at least 2.5% this year, the fastest pace of expansion among major eurozone countries, as well as the creation of 500,000 jobs,” says Isidro Fainé, chairman of CaixaBank, the bank with the country’s largest domestic franchise.

Reflecting this buoyant economic outlook, CaixaBank reported a 100% increase in net income to €375m in the first quarter of 2015 when compared with the same quarter in 2014. Mr Fainé’s confidence in continued growth and recovery is strong enough to commit the bank to returning similar shareholder remuneration in 2015 as in 2014, with the intention of earmarking a minimum of €900m for dividends.

“CaixaBank has not only emerged stronger from the restructuring seen in Spain’s financial industry since 2007, but has, in fact, been the standard bearer for the change, establishing itself as one of the most solvent banks in Europe,” says Mr Fainé.

Environmental concerns

Erwin van Lümich, the managing director of credit rating agency Fitch, says that the performance of CaixaBank and its peers reflects an improved macroeconomic scenario and GDP growth. “We’re seeing improved trends in asset quality and, to an extent, profitability as well,” he says. “An area of concern is the sustainability and the stabilisation and reduction of non-performing loan [NPL] inflows in the event of economic growth below our expectations.”

Mr van Lümich highlights the challenge facing Spain's lenders: that of growing earnings from their core banking activities in a low-interest-rate and low-volume environment. “In previous years, a number of banks have complemented weak banking earnings with income from carry trade, which we do not view as sustainable,” he says.

Banco Popular, which is the Spanish market leader serving small and medium-sized enterprises (SMEs) and professionals, believes that its specialisation saw the bank through the darkest days of the Spanish recession. Popular reported a 6.1% increase in net profit in the first quarter of 2015, with a 95-basis-point reduction in NPLs, which, in turn, allowed for a 6% cut in provisions. “In spite of intense competition, our margins remained stable in the first quarter [of 2015] and we expect this trend to continue in the future,” says Ángel Ron, the bank’s chairman. “Throughout the recession we kept our focus squarely on the business we do best, which is providing specialised services for SMEs and professionals. The result is that, in 2014, we saw a net increase of 80,000 new customers.”

Bankia’s chairman, José Ignacio Goirigolzarri, is optimistic about the knock-on effect of Spain’s strong recovery on the financial services industry. “Spain’s growth this year is outpacing the forecasts and we could be looking at 3.1% GDP growth, according to International Monetary Fund forecasts,” he says. “This could be achievable thanks to lower oil prices, the euro’s devaluation, a cut in Spanish income tax and higher consumer spending, among other factors.”

Mr Goirigolzarri says that Spain's macroeconomic figures are already filtering through to the real economy, which should have a positive impact on business. “We are seeing stronger loan demand, especially in the SME sector, in response to the low-interest-rate environment. Disposable income is also showing growth, and there has been a drop in NPLs and, consequently, in the provisioning level," he says.

Push and pull

Bankia was created from the merger of seven savings banks in 2010 and floated on the stock market the following year. It was the hardest hit of all Spanish banks by the property bubble which burst in 2008, but now, thanks to an aggressive restructuring programme, the bank is hitting its targets and has ambitions to take on its main domestic competitors. Bankia’s net profit rose by 12.8% in the first quarter of 2015 to €244m, on the back of a 7.2% increase in pre-provision operating income and a decrease in NPL provisions, which helped to offset a period of low interest rates. Mr Goirigolzarri says the bank is on track to meet this year’s return-on-equity target of 10%, up from 8.7% in 2014.

Santander remains comfortably Spain’s largest bank by assets, which in the first quarter of 2015 rose 8.2% to €1.37bn, while its net profit was up 18% to €1.7bn. The bank's chief financial officer, José García Cantera, says the Spanish economic recovery has filtered through to the hard-hit mortgage sector, with a 25% year-on-year increase in demand. However, Mr Cantera acknowledges that income will be under pressure over the next 12 to 18 months in an environment of low interest rates and consumer loan demand. “Our strategy to confront this situation is to maintain a tight control on costs, which means fewer branches and staff, and also to improve the cost of risk,” he says. “In Spain, we need to grow our customer base.”

The key plank in this strategy is the bank's '1-2-3 Account', which is aimed at encouraging customers to consolidate their accounts under one Santander roof, with incentives such as 3% interest on accounts up to €15,000 and a discount on the use of Santander credit cards. “We have 100 million customers worldwide, of whom 13 million consider Santander their primary bank, so there is a huge margin for growth” says Mr Cantera. “Our strategy has changed from 'push' to more of 'pull', meaning that we need to know our customers and their needs in order to tailor the appropriate products and services. We aim to extend a personal and fair touch in everything we do, and work on the basis that solutions come not from us, but from the customer.”

BBVA’s chief financial officer, Jaime Sáenz de Tejada, says the past two years have yielded positive surprises for his bank. “Spain’s GDP has been constantly revised upwards, showing that the government’s labour and pensions reforms have worked,” he says. “Likewise, the economy has been helped by quantitative easing by the European Central Bank and lower oil prices. On the labour front, 600,000 jobs will be created in 2015. We have made good progress in bringing down our cost of risk since 2012, and we expect to see further decline before it flattens out in 2017.”

BBVA registered the Spanish banking sector’s biggest increase in net profit in the first quarter of 2015, up 146.2% to €1.54bn. Without including the capital gains from the sales of shares in Chinese bank CNCB, profit increased 52.8% to €953m. Mr Sáenz de Tejada says this strong earnings performance and cost containment measures helped push profits higher.

However, in spite of Spain’s improved economic outlook, there are still some serious challenges ahead for BBVA and the rest of the country's banking sector. “The European financial services sector, in general, faces a major challenge, in that customer deposits fail to yield the profitability levels of the pre-crisis years,” says Mr Sáenz de Tejada. “This means banks have to revise their business model to incorporate the latest technology to provide a better customer experience, increase cross-selling across the customer base and improve efficiency.

"What differentiates BBVA from the rest of the sector is our state-of-the-art technology platform. Since 2007, we have been investing some €850m per year in this area. We are now developing a new customer interface, which is aimed at achieving a superior service quality.”

Global footprint

BBVA, Santander, and to a lesser degree, other major Spanish players, have sought to offset their exposure to domestic market risk through international expansion.     

“Santander and BBVA are the most internationally diversified [Spanish banks], and this has enabled them to mitigate some of the pressures in the domestic Spanish banking market during the crisis,” says Fitch’s Mr van Lümich. “Hence, both these banks have rated A-, a notch above the sovereign’s BBB+. Santander’s diversification is more extensive in countries with higher credit ratings. BBVA has built up a presence more in Latin America and increasingly in Turkey, but is also active in some higher rated markets, such as the US.”

BBVA’s Mr Sáenz de Tejada says the bank’s international footprint is not likely to change significantly in the near future. “We are well established in countries such as Turkey, Mexico and the Andean pact countries [Chile, Colombia, Mexico and Peru], which are showing GDP growth levels similar to Spain of about 2% to 3% per year,” he says. “At the moment, we have no plans to expand though acquisition at home or in the European market. It is true, however, that critical mass is important and smaller banks might find it difficult to comply with a more demanding regulatory environment and the digital challenge, so some opportunities could arise in the future.”

Santander’s Mr Cantera says that, for now, his bank is satisfied with the extent of its international business. Improved performance in the UK and Brazil were a significant factor behind the parent group’s 18% rise in first-quarter net profit. Net income in the first quarter of 2015 grew in nine of its 10 core countries when compared with the first quarter of 2014, with Chile being the exception. Regarding the potential for domestic market consolidation, Mr Cantera says that Santander is open to future possibilities, having already incorporated Spanish affiliates Banesto and Banif into the group.

Bankia’s Mr Goirigolzarri says that, for now, his bank’s strategy is focused on the domestic market, and turning the branch network into a tool for improving client service and creating value for the group. “The idea is to have a network of business advisory centres to grow the sale of value-added products to our customers,” he says. 

Popular’s Mr Ron says that, in the medium term, his bank has to focus on diversification, by business line or geographical presence. “Our SME business has enabled us to stay profitable but there is an advantage to an international presence,” he says. “When the next financial crisis comes along we need to have a bigger international profile in order to export our business model to other countries.”

Outside influence

In 2013, Banco Popular and Mexico’s Grupo Financiero Ve Por Más struck a joint venture by which Mexican investors acquired a 6% stake in Popular, which in turn bought 24.9% of the Mexican group. This alliance is aimed at attracting SME customers in Mexico and other Latin American markets.  

CaixaBank is more focused on acquisitions in the domestic Spanish market, and has been deploying a policy of international alliances. In early 2015, the bank acquired Barclays’ retail Spanish operations, which gives CaixaBank 550,000 new customers, 262 more branches and about 2400 extra staff. Barclays is hanging on to its investment bank and Barclaycard credit card business in Spain, however. In line with this policy, CaixaBank recently called off its €1.09bn bid for Portugal’s BPI, after failing to come to agreement with the bank’s second largest shareholder.

On the international front, in June 2015 CaixaBank sold a 3.7% stake in Mexican lender Grupo Financiero Inbursa to billionaire Carlos Slim’s Inmobiliaria Carso conglomerate for €387m. “We are expanding the Mexican business and we have an agreement with Mr Slim for all of Latin America,” says Mr Fainé. “We have also increased our stake in Austria’s Erste Group Bank to 9.9%, which gives us access to markets in eastern and central Europe.”

CaixaBank also has a 17% stake in Hong Kong’s Bank of East Asia. “The idea is to create a flow of business activity, and we don’t need a 51% controlling interest to achieve this objective,” says Mr Fainé.

The Spanish bank that has been most active in the international market this year is Banco Sabadell, a medium-sized group based in Barcelona. In May 2015, Sabadell paid £1.7bn (€2.37bn) for the UK’s TSB, which according to the Spanish bank’s chairman, Josep Oliu, represents a major step forward in its objective to expand its international presence. “This is one of the pillars of our 2014 to 2016 strategic plan and, with the acquisition of TSB, Sabadell will increase the percentage of its international assets from 5% to 22%,” he says.

“Moreover, the experience we have gained following the integration of seven banks to date, along with our broad experience in customer service in the personal and SME sectors, rank as key factors in creating profit-generating synergies.”

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Read more about:  Western Europe , Spain