Banks operating in Spain have had to deal with an environment of heightened economic uncertainty since the start of 2022, but have emerged in robust financial health in terms of capital levels, says Alejandra Kindelán, president of the Spanish Banking Association (AEB).
“Spanish banks are the most efficient in Europe, with a cost-to-income ratio below 50%, [which is] lower than the 60% average of most of their European peers,” she says. “Profitability, in terms of return on equity, is showing signs of improvement, and we are confident that the banks will be able to support Spain’s real economy, in an environment that is showing signs of a gradual slowdown throughout Europe.”
Ms Kindelán points to the industry’s stock of consumer lending, which amounts to €515bn, or 42% of gross domestic product (GDP), and €483bn for non-financial institutions, equivalent to 38% of GDP.
For now, the major banks have demonstrated their ability to confront inflationary pressure, a proposed government windfall tax and macroeconomic uncertainties at home and abroad. The five major banks – Bankinter, BBVA, CaixaBank, Sabadell and Santander – reported net profit growth of 19% to 50% for the third quarter of 2022.
Market analysts are generally optimistic about the banks’ future profitability, though a few question marks hang over the longer-term outlook. Primary credit analyst Elena Iparraguirre at S&P Global Ratings says this year’s results so far have been positive, thanks largely to Spain’s still strong economic performance, which has supported business growth and kept credit provisions at low levels. “Operating expenses also remained under control,” says Ms Iparraguirre. “We still have to see banks fully benefiting from the rise in Euribor rates, which will underpin net interest income growth.”
Spain is still looking at GDP growth of around 1% in 2023
She says a key question going forward is the performance of asset quality. “A positive trend is that while some European countries, like Italy, Germany and the UK, are experiencing economic contraction, Spain is still looking at GDP growth of around 1% in 2023,” she says. “This will help to contain asset quality deterioration. Moreover, a large portion of the banks’ commercial loan books have Instituto de Crédito Oficial [i.e. state-backed] guarantees, which cover 70% to 80% of the potential credit losses.”
The operating environment will also be a key performance factor. María Cabanyes, senior vice-president, Europe, the Middle East and Africa banking at Moody’s Investors Service, is expecting lower activity in 2023 than in the first half of 2022. “Credit demand is likely to suffer as elevated energy prices and inflation continue to weigh on consumer confidence,” she says. “Mortgage borrowing will slow amid economic uncertainty and tightened lending criteria, while higher rates will also constrain investments.”
Rising rates
Cristina Torrella, senior director at Fitch Ratings, identifies two risks for the banks. One is asset quality deterioration and the second is how higher inflation will affect costs. “As for the former, we expect this to be moderate, considering that Spain’s economy will remain resilient and given banks’ improved asset quality metrics in recent years, including high impaired loan coverage levels,” she says. The combination of interest rate rises and higher inflation will weaken some borrowers’ repayment capacity, she adds, but this is expected to be manageable, partly because of borrowers’ higher savings rates, lower private sector indebtedness levels since the last property crisis in Spain, and the steady increase in fixed-rate mortgage loans.
The significant increase in new mortgage lending in 2021 and early 2022 was due to an overhang of demand and improved economic conditions, which reflected a dynamic property market, according to Fitch director Pau Labró. “However, new consumer lending has not recovered to its pre-pandemic levels,” he says. “Small and medium-sized enterprise [SME] lending declined in 2021 after strong growth in 2020, fuelled by the state guaranteed loan programme. But we saw a recovery in the first half of 2022, particularly for short-term funding to meet working capital needs.”
The rising interest rate environment is expected to help banks, but CaixaBank chairman José Ignacio Goirigolzarri points out that the current upward trend in interest rates follows six years of negative rates. “It is worth remembering that current levels are not that high and remain below inflation,” he says.
Mr Goirigolzarri also voices caution over an abrupt increase in rates, which could affect funding costs and also have a negative impact on the non-performing loan (NPL) book. “There is now a question mark over uncertainties with regard to the macroeconomic situation globally, as well as in Europe and Spain in particular, while the war in Ukraine is, of course, another cause for concern,” he says.
“On the business front, we are seeing trends in areas such as increasing digitisation, which will affect future operations,” he continues. “CaixaBank has a close working relationship with its customer base. We have achieved major revenue synergies with the integration of different customers from Bankia and CaixaBank.”
The rise in interest rates that began in the summer of 2022 did not have an appreciable impact on Banco Santander’s third-quarter results, according to the bank’s chief financial officer (CFO) Jose García Cantera. “[But] since the end of 2021, we have seen a steady growth in the number of net customers, and our integration of ‘One Santander’ in Europe has helped us offer a better sales and post-sales service to our customers,” he says.
As mentioned, the bank has integrated its core countries under the One Santander umbrella and this has enabled the group to make great strides in expanding its digital network, according to Mr Cantera. He says Santander’s competitive edge in the Spanish market is reflected in being market leader in corporate investment banking, asset management and private banking. The bank also accounts for around 25% of the country’s SME business.
“When central banks began raising interest rates, it was thought this would be a temporary measure,” says Mr Cantera. “We are now seeing benefits in operating costs but not on the income side, given that this increase only started several months ago.” He echoes general market apprehension over higher rates and the trend in risk quality going forward. “We are facing a possible technical recession,” he says. “Santander has set up a €1.1bn reserve fund to deal with the possibility of loan deterioration, €200m of which is set aside for the Spanish market. We need to adopt a policy of caution regarding an uncertain economic future.”
While the market is dominated by a handful of large players, medium-sized Bankinter has been competing successfully with larger lenders in terms of total assets. CEO María Dolores Dancausa attributes this to the group’s agility, range of products and services, and a prudent risk policy.
“We have always been quick to adapt to shifts in the market and economic environment,” says Ms Dancausa. “Our focus on organic growth has enabled us to rank first in Spain and third in Europe in the latest European Banking Authority stress test. Our medium- to high-net-worth customer base affords greater protection against rising inflation and Euribor rates.”
The bank’s international corporate business has reported a gross annual margin above 40% in the third quarter, while investment banking is developing closer ties with its customers at a time of market volatility and uncertainty. “We have recently rolled out new business segments, which we believe have great potential,” she says. “The insurance business is a case in point, through our recent bancassurance partnership with Liberty. We also need to look at our profitable businesses in Portugal, Luxembourg and Ireland.”
BBVA global head of finance Rafael Salinas, adds: “The rise in rates translates into higher levels of lending to businesses and less to personal customers, who nevertheless see more benefits coming through in their interest-bearing deposits. In the first half of 2022, corporate lending grew by 14%, compared with 7% for individual customers.”
Windfall tax
The banking industry is understandably unhappy about the government’s proposed windfall tax, which now awaits a report by the European Central Bank. “There is uncertainty surrounding this measure,” says the AEB’s Ms Kindelán. “This is not a good moment to impose extraordinary burdens on the banks. The tax could potentially reduce lending by €50bn, equivalent to roughly 300,000 mortgages. In addition, it would have a negative impact on six million retail investors and the sector’s competitiveness. Spanish banks are already burdened with the highest tax rate in Europe, which would stand at 10% above France if this measure is approved.”
Santander’s Mr Cantera echoes this sentiment. “As for the 4.8% windfall tax on net income and fees the government contemplates levying on the banks, we think this is not right at a time when we are facing what looks to be an economic slowdown, higher inflation and increased provisioning,” he says. “We are not going to have windfall profits, so this distorts the banks’ operating models.”
As for the windfall tax, we think this is not right at a time when we are facing what looks to be an economic slowdown
The quantitative impact of the government’s proposed bank tax is considerable and could translate into a cost of €250m a year for BBVA, says Mr Salinas. “It amounts to a drain on resources and lower growth,” he adds. “This is an illogical initiative since it limits our ability to help businesses grow. The tax would lower the capacity of the banks to provide services to foster economic growth.”
Nonetheless, BBVA’s strategic goal for 2023 is to carry on transforming its business model, while holding firm to the bank’s mix of profitable products. “There has been a 54% increase in the number of new customers in the first three quarters of 2022 who have joined us through digital banking and of these, two-thirds become multi-product customers,” says Mr Salinas. “Our goal is to ensure financial health and one of the key elements of this is to boost the digital segment of the business. As of now, about a third of new mortgage customers have previously used the BBVA Valora property evaluation system and 27% of investment funds sold use the BBVA Invest platform.”
Banco Sabadell’s net interest margin increased by 7.4% in the third quarter of 2022, bringing the total to 6.2% for the year to date. “This progress reflects our robust business model and the progress achieved by [UK bank] TSB [acquired by Banco Sabadell in 2015], and allows us to improve our net interest income growth guidance for year-end to high single digits,” says the bank’s group CFO Leopoldo Alvear.
“Growth is forecast for the net interest margin. However, this will depend on several factors, such as interest rates or the pass through on deposits,” he says. “We have managed to boost commission income from services, credit cards, loans and other areas of business, despite the fact that there is usually some seasonal impact in the third quarter.”
Mr Alvear says that comparing the third quarter of 2022 with the same period in 2021, the 6% increase in new lending to corporates is also noteworthy, having reached €2.06m between July and September 2022. “The NPL ratio at the end of the first three quarters [of 2022] has shown a decline to 3.4%, from 3.59% in the same period of 2021,” he says. “Our credit cost of risk stood at 39 basis points [bps] at the end of the third quarter of 2022, a reduction of 12bps in year-on-year terms. We do not expect to see any substantial change in the coming months.”
There has been market speculation over Banco Sabadell’s long-term commitment to TSB. However, the latest set of results would indicate the UK subsidiary has become an increasingly profitable contributor to the parent’s business. “Our strategy with regard to TSB remains unaltered,” says Mr Alvear. “[TSB] has grown its profits and group contribution in each quarter this year. At the end of September, its contribution to Sabadell’s net profits was €93m, compared with €82m in the same period of 2021. We expect this upward trend to continue.”
Inflationary pressures
Looking ahead, Spanish bankers are aware of the threats posed by the political and economic uncertainties of 2023, including high inflation and rising energy prices brought on by the war in Ukraine. However, the banks have not yet felt the impact, according to Bankinter’s Ms Dancausa.
“The rise in inflation has not made a significant impact on our efficiency ratio, which at the end of September stood at 43%,” she say. “The increase in our expenses is roughly half that of inflation. That said, we must remain aware that rising inflation is having a negative effect on many families and companies. However, this is a temporary phenomenon and our analysts are looking for a flattening of prices to 3.8% in Spain in 2023.”
BBVA’s Mr Salinas adds: “[Such uncertainties] could lead to some impairment in our loan portfolio, as we work to manage the pressures brought on by rising inflation. But it is important to bear in mind that we operate from a position of strength. Our core capital, liquidity and efficiency are significantly higher than when we entered the last global economic crisis 14 years ago.”
Banco Sabadell’s Mr Alvear says: “We see headwinds as well as tailwinds in store for next year. Rising interest rates should have a net positive effect on the business, while a slowdown in economic activity and the rise in bad debts, which we expect to be manageable, are matters of concern. Increased costs due to higher inflation is another potential negative factor.”
