banco sabadell

The Spanish banking sector has rebounded strongly from the pandemic, posting strong results for 2021. However, uncertainties remain over inflationary pressures and the evolution of interest rates. Jules Stewart reports.

“The spectacular bounce back of Spain’s banks in 2021 is good news and represents a significant improvement over the previous year, which had been a period of instability for the financial sector. We were [expecting] winners and losers, but in fact there were no losers.”

So says José María Roldán, chairman of the Spanish Banking Association (AEB). Several factors underpinned the rebound about which he was speaking, among which is the fact that the economic impact of the Covid-19 pandemic proved to be less drastic than had been anticipated. Banks also took advantage of this period of uncertainty to strengthen their balance sheets and intensify the rollout of their IT platforms. 

“There is every likelihood this robust performance will be repeated in 2022,” says Mr Roldán. “The banks have introduced major improvements in efficiency on a permanent rather than a one-off basis. They have therefore achieved greater manoeuvrability and a reduction of their non-performing loan [NPL] portfolios. It is also important to note that negative interest rates are gradually becoming a thing of the past.”

Strong results

The major Spanish banks’ 2021 performance was, in most cases, impressive, and several lenders reported a truly eye-catching set of results.

Banco Sabadell’s profits rose from €2m to €530m, BBVA was up €2.3bn to €5.06bn, Bankinter’s profits grew more than four times to €1.33bn and CaixaBank increased its profits by €3.85bn to €5.23bn. Meanwhile, Banco Santander achieved an attributable profit of €8.12bn last year, compared with a loss of €8.77bn in 2020, when the bank made a non-cash adjustment to the valuation of goodwill and deferred tax assets.

This excellent outcome from Spain’s banks in most cases surpassed the European average, according to Ángel Berges, deputy chairman of Madrid-based financial consultancy Analistas Financieros Internacionales.

“In 2020, there were serious apprehensions about future performance, given that no one could foresee the Covid-19 pandemic’s impact on assets,” says Mr Berges. “Given this uncertainty, the banks took swift action in 2020 to strengthen their balance sheets by boosting NPL provisions to four times the 2019 level. As a result, the main lenders were able to cut NPL provisioning by half in 2021, though they were still much higher than, in fact almost double, the pre-pandemic level.”

Santander chief financial officer (CFO) José García Cantera identifies three factors that underscored the bank’s 2021 results.

“On the one hand, we have a broad international network covering many countries and business areas,” he says. “The global pandemic did not have the same impact in all countries and thanks to this diversity we were able to boost profits. Second, 76% of transactions conducted by our customers around the world were via digital platforms. This compares with 55% in 2019. In the same period digital sales stood at 54%, versus 36% three years ago. We must also emphasise the bank’s focus on its client base. We have a corporate and investment banking unit, but we are primarily a commercial bank, where the portfolio of personal customers continues to grow.”

Inflationary pressures

Looking ahead, Mr Cantera is confident of continued improvement in 2022, as world economies recover from the pandemic.

“There is a question mark over inflation and to what extent this is structural, and the steps to be taken by central banks to contain it,” he says. “The market believed it was going to be a temporary phenomenon, but it’s looking more like a drawn-out trend. Central banks have increased rates, which, for banks, has a more positive than negative impact on business.”  

Cristina Torrella, senior director, financial institutions at Fitch Ratings, adds: “We have seen a good set results from the large Spanish banks in 2021, driven by several factors. Business activity has been picking up in line with the country’s economic recovery, supporting banks’ core revenues. In particular, new mortgage lending activity showed a strong recovery during 2021, while new consumer finance gained traction in the fourth quarter of the year.”

Ms Torrella says the NextGenerationEU funds will help to boost loan demand from corporates and small and medium-sized enterprises (SMEs) in certain economic sectors, and the banks are there to provide credit.

Equally important has been banks’ good fee income generation and lower loan impairment charges on better macroeconomic prospects embedded in banks’ provisioning models.

“The banks have been active in boosting fee income businesses such as asset management and insurance, and we see scope for further growth in 2022 as borrowers continue to deploy savings buffers in these products,” says Ms Torrella. “The banks have also undergone significant restructuring processes in recent years, structurally reducing their cost bases and providing them with additional financial flexibility against inflationary pressures.”

So far, there has been little evidence of asset quality deterioration, but Ms Torrella expects this to emerge in 2022, albeit at manageable levels.

“Risks remain regarding the exposure to the SME sector that is still benefitting from favourable conditions of the state-guaranteed loans,” she says. “Prolonged inflationary pressure could be another potential source for some borrowers, as their disposable income could be impaired.”

Bankinter chief executive María Dolores Dancausa expects 2022 to confirm the economic recovery and loan demand. That said, she also expresses concern over inflationary pressures.

“This will have an effect on European Central Bank policy regarding a rise in interest rates,” she says. “Holding the line on inflation needs to be a prime target for governments and central banks. The sooner decisions are taken, the better the chances of minimising negative risks to the economy.”

The year the pandemic took hold, Bankinter’s profits dropped by 42% to €317m.

“This was due to the need to set aside higher provisions for a potential macroeconomic downturn,” says Ms Dancausa. “In 2021, our profits bounced back with strong gains in business activity, thanks to the economic recovery. This enabled us to achieve €1.33bn in net profit, to which must be added the spin-off of the stock market listing of our partially-owned insurer Línea Directa Aseguradora. 

“Even without this capital gain, our profit was 37.9% above the previous year,” she adds. “We are not resting on our laurels and our objective for 2023 is to achieve €550m in net profit, which would put us on track to recover the level of results achieved in 2019, now without Línea Directa’s contribution.”

State support

Elena Iparraguirre, director of financial institutions at S&P Global Ratings, underlines the importance the government support scheme played in the midst of a significant economic downturn.

“The Spanish banks’ overall performance for 2021 was better than we had expected,” she says. “Revenue proved resilient and income from fees grew strongly. Also, credit provisioning was roughly half of what was anticipated and there were no signs of asset quality deterioration. One doubt hanging over 2022 and beyond is whether, despite state assistance, some corporates may be unable to return to previous levels of profitability and to cope with higher indebtedness.”

CaixaBank CFO Javier Pano says the bank’s first reaction to the Covid pandemic was to seek ways to provide support for its client base, helped by the state and private sector working together, with the backing of government loans and a moratorium on loans.

“This was the focus of our attention in the first half of 2020, a period of great uncertainty regarding the impact of the pandemic on the Spanish economy,” says Mr Pano. “CaixaBank adopted a proactive approach, by setting aside significant reserves against the risk of a rise in NPLs.”

The bank granted €22bn in state-guaranteed loans in 2020 and loan moratoria of more than €20bn during the same period.

“Given the size of these operations, there was a lower demand for loans in 2021 as more liquidity was introduced into the system,” says Mr Pano. “The situation is now returning to normal, thanks in part to the increased demand for mortgage loans. Last year yielded positive results in our insurance and long-term savings businesses, as we put the finishing touches to the Bankia-CaixaBank merger.”

Future issues

Mr Pano sees several uncertainties for this year and in the immediate future.

“First, we do not know when we will finally emerge from the pandemic and this remains a latent threat,” he says. “We need to keep an eye on the evolution of rates, which are now on the rise. This is structurally positive for us as a retail bank, in that it may allow us to improve our interest margin. Until now, negative interest rates had been a serious drain on income. Inflation is another factor to watch. This is expected to level off to a soft landing in 2023.”

Mr Pano says the entity emerging from the Bankia-CaixaBank merger has competitive advantages in the Spanish banking market.

“CaixaBank’s business structure is simpler than that of our largest peers as we operate almost exclusively in Spain,” he says. “This enables us to have a close relationship with our customer base. We are also the only large bank with a fully owned and integrated life insurance company, VidaCaixa, which is Spain’s largest. This means we can offer an unparalleled range of services and products, while enjoying broader operating manoeuvrability.”

The impact of the global pandemic varied across BBVA’s global businesses; but by the second half of 2021, the bank saw a return to normality in the corporate sector, with an acceleration in new loans. This followed an earlier recovery in the retail segment, according to CFO Rafael Salinas.

“We emerged from a period of high provisions for potential bad debts and saw a gradual credit improvement last year,” he says. “We can now point to 2021 as the bank’s best year in the past decade. This is largely due to our strong focus on a diversified business model and the economic recovery achieved in some countries, like Mexico, where it was back to business as usual by the end of 2020.”

BBVA has been diversifying its portfolio around the world for 30 years by developing leading franchises and at present half the bank’s capital is allocated to emerging markets, which provide around 70% of its profits.

“In the coming years, as monetary policies normalise in Europe, we will see a rebalancing of results between developed and emerging markets,” says Mr Salinas.

This is the first time in 10 years we have seen growth in the mortgage book and we have not had to deleverage

Leopoldo Alvear

Sabadell adapts

Banco Sabadell is another lender concerned about the pandemic; it worried whether the hit on liquidity would be a temporary phenomenon, or if this signalled a structural crisis for the banks. Like its rivals, Sabadell applauds the support provided by the government in alleviating these worries.

“The consumer finance and mortgage sectors performed better than expected, and we expect virtually no negative impact on the business in 2022,” says Banco Sabadell CFO Leopoldo Alvear. “This is the first time in 10 years we have seen growth in the mortgage book and we have not had to deleverage. We can confidently say that, unlike the 2008 financial crisis, on this occasion the banks have been part of the solution instead of the problem.”

Under the strategic plan announced in May 2021, the bank has reduced staff numbers by 20% and its branch network by 25%.

“In effect, we have managed to change our bicycle wheel while cycling and without falling off,” says Mr Alvear.

Market rumours abounded in 2020 that Sabadell was seeking a buyer for TSB, its UK subsidiary, which had reported significant losses for the year.

“We initiated a refocusing of the UK subsidiary’s core mortgage business and successfully resolved the two banks’ IT compatibility problems,” says Mr Alvear. “TSB now operates in a low-risk consumer mortgage market and, as a result, turned its £160m loss for 2020 into a £130m profit in 2021. TSB now accounts for 20% of the group’s capital and 22% of profits, figures which we would expect to see increase this year.”

Banco Sabadell’s decision to retain TSB, at least for now, is a sensible strategy, according to S&P’s Ms Iparraguirre.

“The Spanish bank’s previous management team was keen to find a buyer for TSB in order to free up capital,” she says. “This decision was reversed about a year ago by the new team who decided it made more sense to add value to TSB by completing its restructuring, while retaining the option of a sale at a future date.”

Chiara Romano, Spanish banks analyst at Scope Ratings, says one of the reasons Spanish banks returned impressive results last year is that much of their provisioning for bad and doubtful debts had been dealt with in 2020.

“That said, net interest income is still on the decline, though we might see a turn round this year,” she says. “The banks have also reported strong growth in fees and commissions, especially CaixaBank and the other large entities. For the banks that initiated restructuring early on, the decline in operating expenses already started feeding into results in 2021. For the others, including those active in mergers and acquisitions, we expect cost synergies to become increasingly visible in 2022.”


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