A low interest rate environment, the spiralling cost of digitisation and competition from disruptors are all squeezing Spanish banks’ profitability but the general feeling is one of cautious optimism. Jules Stewart reports.


Spanish bankers are cautiously optimistic about the outlook for the current year, despite the ongoing squeeze on profitability brought on mainly by low interest rates.

This view is supported by a significant reduction in non-performing loans (NPLs) and the buoyant growth of the Spanish economy. “We expect to see 2.6% gross domestic product [GDP] growth in Spain in 2019, which is positive when compared with the rest of Europe,” says José María Roldán, chairman of the Spanish Banking Association (AEB).

“There is a slowdown in the US and European business cycles. However, the banks today have three times as much capital on their balance sheets than before the start of the 2007 recession. They are in a much stronger position to confront a downturn. There are some doubts, however, about how the cycle will interact with economic fragility and a high level of public debt.”

Property portfolio sell-off

José Ignacio Goirigolzarri, chairman of Bankia, Spain’s fourth largest bank by Tier 1 capital, says there has been a sizeable decline in NPLs in the financial services industry, thanks largely to the sell-off of property portfolios that were held on the balance sheet. “We are witnessing a deleveraging process in the economy, while on the other hand there has not been a major escalation in competition,” he says.

Jordi Gual, chairman of leading domestic lender CaixaBank, believes the economy will provide a major impetus to positive bank performance, saying: “In Spain, the economy continues to perform rather well, with good GDP growth and investor confidence, in spite of the ongoing political turmoil. That said, as an industry we are not yet out of the woods and a few players might need to do some homework.” 

Mr Gual expresses concern over the nagging problem of depressed interest rates. “In the US, the Federal Reserve was on track to announce an increase, but for a variety of circumstances it changed its policy,” he says. “If anything, the markets are now expecting a possible further cut at some point. US rates are higher than in Europe but they’re still at historically low levels. Meanwhile, an increase in [rates in] the eurozone was put on hold after 2018’s fourth-quarter slowdown in the economy, which put pressure on the European Central Bank to keep them low.” 

Banco Sabadell chief financial officer Tomás Varela believes the expectations of an interest rate rise seem more remote than in the past. “Almost everyone agrees that we're moving from low rates for longer, to something resembling low rates for ever,” he says. “Nevertheless, we have enjoyed three years of double-digit income growth. In these circumstances, we want to find more ways to serve our customer base and grow on all fronts, from credit cards to insurance."

Testing conditions

The Balearic Islands-based Banca March is the only Spanish bank that has been in family hands since its foundation in 1926. Chief executive José Luis Acea says the current banking environment is characterised by low rates, regulatory pressure and the appearance of new players, such as fintech operators and the GAFA group of Google, Apple, Facebook and Amazon. “They are putting to the test many banks’ ability to adapt,” he says. “In this context, we believe that our specialised strategic focus on private banking and advisory services for corporates and families will enable us to transform these challenges into opportunities.”

Benjie Creelan-Sandford, an analyst at Jeffries International, points to one piece of good news amid the general disappointment over interest rates. “Euribor rates have surprisingly held up,” he says. “Spanish banks entered 2019 with a 12-month Euribor rate seven basis points higher than a year ago. We expect this to offer near-term support to margins.”

At S&P Global Ratings, director of bank ratings Elena Iparraguirre says that while low interest rates are putting pressure on earnings, they have helped to keep asset quality under control. She adds: “Banks have confronted this situation by reducing operating expenses, but they will have to fight to sustain profitability and maintain a viable business model. This will be more difficult for the medium-sized players that lack the earnings diversification and scale to dilute fixed costs. Some of them may struggle to demonstrate the long-term viability of their franchise.”

Nevertheless, the Spanish banking environment is looking more encouraging today than was the case in 2018, thanks to an additional year of balance sheet strengthening. “We’ve seen an improvement in one area that was a matter of concern for us, namely the decline in non-performing asset [NPA] portfolios,” says Ms Iparraguirre. “We believe these may have been brought down by at least 40% in 2018, which represents a meaningful step forward. This was achieved thanks to major sales of largely real estate assets to institutional investors. This was the case with banks such as Santander, which inherited a sizeable NPA portfolio from its takeover of Banco Popular, with similar stories at BBVA, CaixaBank and Sabadell.”

Growth in loans

Cristina Torrella, senior director and head of Spanish banks at Fitch Ratings, says one difference in the Spanish banking environment in 2019 compared with 2018 is that there will be net loan growth on banks’ balance sheets and, for some players, an upward revision of targeted capital ratios.

“New loan production was significant in the past two years, especially with regard to consumer and small and medium-sized enterprise lending,” she says. “However, this was not so visible, as banks were engaged in derisking, and mortgage redemptions outpaced new lending volumes. Macro-economic data suggests loan demand so far in 2019 remains solid. Households are increasingly asking for mortgage loans and credit to businesses continues to rise.”

Ms Torrella believes that for the first time in several years, loan demand should outpace the rate of mortgage redemptions and continued, albeit slower, derisking, resulting in modest single-digit net loan growth in 2019.

The big question hanging over all the banks is how to boost profitability in this scenario. CaixaBank’s Mr Gual says the continued low interest rate environment is a matter that has “huge implications” for the banking industry. “There was hope in 2018 that a rise was on the cards in the near term,” he says. “But it now looks like this has been delayed for at least another year. Much of this is due to political uncertainties, such as those brought on by Brexit, not to overlook the rise of populist movements in several European countries.”

Brexit is also a matter of concern for Banco Sabadell, which in 2015 paid £1.7bn ($2.17bn) to acquire UK lender TSB. In 2018, the Spanish bank’s profits last year took a hit due to IT migration problems, although excluding the extraordinary provisions for this issue, net profit grew by 14.7% year on year.

“From a business point of view, TSB has a strong loan portfolio, with a 48% to 50% loan-to-value average,” says Mr Varela. There is the question of how Brexit will affect the bank’s UK operations and he acknowledges that uncertainty persists over the eventual outcome. “A no-deal withdrawal is likely to impact negatively on GDP, but the UK remains a powerful economy with good growth potential,” says Mr Varela. “TSB is a purely retail bank so we are not unduly concerned about a European passport and, moreover, we are fully hedged.”   

M&A possibilities

Fitch’s Ms Torrella believes profitability pressures will persist for Spanish banks as a result of depressed interest rates, as well as major outlays on IT investments and higher regulatory requirements. One way to address this problem is through further rationalisation in the banking industry. “We continue to see a rationale for consolidation moves, particularly involving mid-sized Spanish banks,” says Ms Torrella. “Merger talks between Unicaja and Liberbank pointed in that direction, but the operation did not come to fruition.”

The only merger on the cards for 2019 was an attempt to put together regional groups Unicaja and Liberbank, two banks that were themselves created by the amalgamation of several former savings banks. After nine months of negotiations, the deal collapsed in May over disagreement on the breakdown of share ownership. Unicaja demanded a 60% stake in the new group, while Liberbank refused to accept less than a 45% stake.

“The timing of any future consolidation moves is unclear as the execution risks involved are significant,” says Ms Torrella. “We see those banks lagging behind in cleaning up their asset quality and with weaker overall financial metrics to be more vulnerable to a higher than expected economic slowdown.” 

The most eye-catching deal was Santander’s takeover of domestic rival Banco Popular for the symbolic price of €1, after EU authorities declared the Madrid-based lender “failing or likely to fail”. Banco Popular’s balance sheet was at the time of the takeover in June 2017 burdened with €37bn in toxic loans to the property sector. Santander’s chief financial officer, José García Cantera, believes that if there is to be further consolidation in the Spanish banking sector, this is much more likely to take place on an intra- rather than an inter-country basis. “For now, cross-border mergers are not likely in Europe. We would need a closer banking union for that to happen,” he says. 

Another major operation in Spain was Bankia’s 2018 merger with Banco Mare Nostrum, a Madrid-based amalgamation of four former savings banks. “We have now finalised the integration of both banks’ systems,” says Mr Goirigolzarri. “A rapid process of this nature will obviously have some negative implications for the business, but we saw strong recovery over the summer of 2018, along with a return to high levels of customer satisfaction.”

Banca March’s Mr Acea is confident the lender's unique banking model will enable it to occupy an independent niche in the Spanish financial services market. “That is why our core strategy is aimed at organic growth,” he says. “We would only consider an acquisition if we found an institution whose values made a perfect fit with our business model. A good example of this was the takeover in 2017 of Bilbao-based wealth management group Consulnor. This was a model of the type of operation that might be of interest to us.”

Digital investment

Mergers can provide cost synergies, but bankers will typically require other options for confronting the squeeze on profits. To this end, Spain’s banks are investing heavily in digital technology. S&P’s Ms Iparraguirre places this in the context of further consolidation among the mid-sized banks, which she sees as a likely trend.

“This could help them reduce operating expenses, boost profitability and gain in diversification,’ she says. “But they need to keep on investing in IT to deal with the issue of digital banking.” 

CaixaBank’s Mr Gual says the immediate problem is not so much one of growth, as of digital transformation. “We are heavily focused on developing our digital business," he says. “In a stable market with limited growth opportunities, we have identified changes in consumer habits and challenges from technology competitors. For CaixaBank, this represents a fundamental opportunity. We are now Spain's leading player in digital banking.” 

Mr Gual says the bank’s internal digital transformation is enabling the group to do things faster and achieve greater customer satisfaction. “This goes for businesses as well, which have seamless digital access to our services,” he says. “CaixaBank Group has 15.6 million customers, of whom about 14 million are located in Spain. Our digital market share is 32% in Spain, and 58.5% of our client base is currently using digital services.” 

The AEB’s Mr Roldán applauds these efforts to build an efficient digital business, while stressing that in his view: "We have not seen anything resembling a digital revolution. That said, the banks have begun to roll out their digital platforms and cut back on their branch networks. They have no issues with smalls techs, but this is not the case with big techs, which threaten to disrupt a level playing field. Open banking obliges banks to give third-party service providers access not just to client data, but also to their financial resources. Yet big techs have no obligation to share customer data. This asymmetry is unsustainable and unfair.” 

Banco Sabadell’s Mr Varela says the bank’s digital platform is continuously expanding and, despite the investment required, it remains focused on reducing costs. He believes this can be applied to international business in Mexico, where Banco Sabadell started up retail operations in 2018. “In Mexico, where more than 80% of the population own a mobile phone, fewer than 40% have a bank account,” he says. "This offers a major opportunity for our digital banking services.”

A personal touch

Bankia chairman Mr Goirigolzarri also recognises the need to remain strongly focused on efficiency and invest heavily in digitisation and artificial intelligence, while opening new channels with customers.

“The difficulty is to combine digital implementation with a large branch network," he says. “We operate a well-defined digital platform that opens the door to major cost savings. We need to avoid alienating the older segment of our customer base. As of now, 50% of our customers have access to a branch or digital personal adviser. We are witnessing growth in the number of branch customers with a personal adviser, as well as more digital customers who receive personalised attention thanks to our Conecta con tu Experto [Connect with your Expert] service.”

Like the other major players, BBVA’s stated focus for now is on organic growth, with a view to increasing market share, according to Cristina de Parias, BBVA's country manager in Spain. “We have started the year with positive dynamics in Spain,” she says. “There has been good news in activity trends. Lending grew 1.8% year on year in the first quarter in 2019, with notable growth in consumer lending and credit cards, which were up 19.7%, and medium-sized businesses, which rose by 7%. Balance sheet shrinkage has finally come to a halt.

“The focus is on the customer, which is a 24/7 relationship. Our digital platform is the most advanced in the Spanish banking system. More than 60% of our domestic customers use our digital services. One of every two products is acquired via digital channels. As of this year, 94% of our products and services are sold via digital channels. This is what sets us apart from the competition,” she adds.

Ms de Parias believes BBVA is able to introduce three new functionalities every month and 10 improvements in existing products. “We are the first bank in Spain to launch the Agregador de Cuentas, a financial aggregator, for personal and corporate customers. This is available to business customers as BBVA One View and retail clients as BBVA Aggregation Service. These systems allow customers to consult all their accounts from a single dashboard," she says.

“Leveraging big data technologies, they gather and organise information on bank accounts and other financial products, allowing customers to make decisions more efficiently. Our Bconomy is a tool that analyses customers’ financial health, to help them manage their finances. We can advise a customer of the risk of an overdraft, for instance, with an alert of a large payment due and offer a loan to cover it, or a transfer from another account,” she adds.

A brighter future

Santander’s Mr Cantera says the group is prioritising its digital strategy, with a view to becoming the industry leader in this sector. “Digitisation breaks down barriers between countries and enables a group such as ours to work in a more integrated way, making the most of economies of scale,” he says.

“To this end, we have recently announced a simplification in the way we manage our business, with the creation of three regional areas, which are Europe, South America and North America. The aim is to extract synergies and integrate services. In tandem with this, we operate three global businesses, which are corporate banking, wealth management and our digital platform.” He adds that the group has embarked on a cost-cutting exercise, which will bring overall savings of €1.2bn, of which €900m corresponds to Europe, where the banking environment is more problematic.

In 2018, Banca March unveiled its €75m Digital Transformation Plan, scheduled to be completed in 2020. “The programme is based on three main objectives,” says Mr Acea. “We aim to enhance the customer experience, grow the number of digital tools available to our managers and boost the efficiency level of our internal processes. It also aims to transform our offices in multi-channel advisory centres to facilitate our customers’ banking services. Nearly 50% of our clients now use our digital channels, a figure that rises to 62% in core segments such as private, family and corporate banking. In 2018, we expanded our digital payments services with Google Pay and Apple Pay. The most recent innovation is the voice assistant Smart Display.”  

The overall outlook is summed up by AEB chairman Mr Roldán, who is cautiously confident Spain’s banks will show a stronger performance in 2020. “We are looking for improved profitability in 2020, with an average return on equity in the 6% to 7% range,” he says. “This is encouraging, but it still doesn’t cover the average 10% cost of capital. We don’t see a great deal of light at the end of the tunnel, but at least there is no train heading in our direction.”


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