Spanish banks have exhibited resilience in the face of the pandemic, but an uncertain future is leading many to seek mergers.

Spanish banks have proven themselves remarkably resilient at riding out the coronavirus-induced economic storm. The results for 2020 bear out the strength of the banks’ underlying fundamentals. In a year when devastated balance sheets would be reasonably expected, all the major banks reported a profit, albeit down from the previous year’s level.   

“So far, we have not detected any deterioration in the banks’ asset quality,” says Pepa Mori, senior credit officer at Moody’s Investor Service. “In fact, the non-performing (NPL) ratio has been improving over the past year.” She cites the Spanish government’s loan guarantee programme as one of the main reasons banks’ balance sheets have not suffered unduly.

We still have to see the full impact of the coronavirus crisis on Spain’s banks

Elena Iparraguirre, Standard & Poor’s

Another factor that mitigated the effects of the pandemic has been a moratorium on debt repayments, which ended in September 2020. “We cannot rule out a further increase in NPL provisions in the future, in addition to the significant provisioning effort already made in 2020, to cope with a potential deterioration in asset quality,” Ms Mori says. She expects asset quality deterioration to become visible once support measures have expired. 

Tourism and small business hit

Elena Iparraguirre, director of financial institutions at ratings agency Standard & Poor’s, says: “We still have to see the full impact of the coronavirus crisis on Spain’s banks. There are reasons that explain why Spain was hit harder than others. Spain’s economy is largely service-based and tourism accounts for a large share of that sector. We also need to consider the country’s large number of small and medium-sized enterprises (SMEs), which are by nature more vulnerable to crises due to their limited financial resources.” 

Ms Iparraguirre believes Spanish banks are likely to still face high credit losses this year and that 2020 provisions will be enough to fully cover the costs of the crisis. Hence provisions are likely to remain high in 2021.

The banks’ NPLs stand at 3% of the total loan book, based on the most recent data from the Bank of Spain, the country’s central bank. Revenues remain weak with interest rates at an all-time low, so the major players have been acting on the cost side to tackle downward pressure on top-line revenues. This is expected to continue into 2021. That said, the industry’s overall cost-to-income ratio, at 58%, compares favourably with the EU average of 65%. 

José María Roldán, chairman of the Spanish Banking Association, says it is difficult at this stage to quantify the impact of the pandemic on Spain’s banks. “The Spanish government has taken a number of steps, such as a debt moratorium and loan guarantees, that have helped in great measure to limit potential damage to the banks’ balance sheets,” he says.


Jose Maria Roldan, Spanish Banking Association

“That said, we probably won’t be able to gauge the outcome until the autumn of 2022. For now, the banks have sufficient capital to deal with the situation. One factor working in their favour is that the crisis did not hit in the middle of a real estate bubble, as was the case in 2008,” he adds.

M&A activity on cards

Given the tough operating conditions, the banks have assembled an arsenal of tools to mitigate the crisis. The stronger a bank’s market presence, the better equipped it is to weather the storm. At a time of near-unprecedented uncertainty and concern over future profitability, several banks have embarked on a path of consolidation widely interpreted as a portent of future trends. After previous frustrated attempts, in 2020 Unicaja agreed to buy rival Liberbank in an all-share deal, adding to a flurry of deal-making in Spain’s finance industry. Analysts believe this could represent the tip of an iceberg of merger activity.

“We cannot rule out further mergers in the sector,” says Moody’s Ms Mori. “There are still a few medium-sized banks that could be potential candidates.” This followed closely on the heels of talks between BBVA and Banco Sabadell, which failed to materialise in November because of disagreements over pricing. 

Cristina Torrella, senior director at Fitch Ratings, believes there is room for Sabadell to remain independent after the failure of the merger talks with BBVA, as long as capital is preserved and the economic recovery materialises. However, the bank will probably be subject to merger rumours during 2021, she says.

“Meanwhile, management remains focused on using its managerial levers by making its domestic franchise, particularly in the SME segment, worth value, revisiting its distribution network and capacities and scaling up digitisation,” she adds. 

Sabadell’s net profit plummeted to €2m in 2020, compared with €786m in the previous year. The bank said it had set aside €2.27bn in provisions as a result of the coronavirus crisis, restructuring the costs of its domestic and UK operations, and the disposal of problem assets.

The bank recently announced new efficiency initiatives in Spain and plans to accelerate cost cutting in the UK (where it owns TSB), to protect earnings in the current challenging economic environment. The new plan is targeted to add pre-impairment income of about €115m from 2021 onwards. This includes cost savings from staff reduction and further business automation and digitalisation in Spain, as well as the acceleration of TSB’s restructuring a year ahead of schedule. The Spanish parent is rumoured to be actively seeking a buyer for its UK subsidiary. 

Mega-merger surprise

The industry was rocked by a bombshell announcement in September 2020, when CaixaBank and Bankia approved a merger to create Spain’s biggest bank by retail market share. The newly created lender, which has retained the CaixaBank brand, has combined assets of more than €664bn.

“For us at CaixaBank, the operation is logical and has a clear sectorial rationale,” says CaixaBank’s chief financial officer (CFO), Javier Pano. “It allows us to gain in efficiency and financial strength without losing our essence and our way of doing banking.” CaixaBank reported an attributable profit of €1.38bn for 2020, down 19% from the previous year, after an extraordinary provision of €1.25bn in anticipation of further hits from the pandemic.

“We view the CaixaBank-Bankia merger as a positive development,” says Fernando Sánchez, associate director at Fitch Ratings. “It makes strategic sense from a business and scale perspective, and offers a chance to achieve recurring cost savings of some €770m by 2023, equivalent to around 12% of combined 2019 operating expenses. This, in our opinion, outweighs the integration risks that are customary in a merger of this magnitude and complexity, along with the fact that the combined entity will operate with tighter capital ratios.”

Regarding potential for further consolidation, he says merger and acquisition (M&A) activity or attempts to create mergers will continue in 2021. “We still see room for consolidation,” he says. “With limited room for growth, ongoing challenges to margins from the prolonged low interest rate scenario, the onslaught of the economic recession due to the pandemic and the need to scale up IT investments, banks will continue to seek cost savings from their distribution networks, so domestic deals could be an option. In addition, the bank supervisor is being supportive of merger deals.”

We cannot rule out further mergers in the [banking] sector

Pepa Mori, Moody’s

“When the CaixaBank-Bankia merger was announced, we affirmed CaixaBank’s ratings and placed Bankia on review for an upgrade,” says María Cabanyes, senior vice-president at Moody’s. “We didn’t think the merger with Bankia would create a stronger CaixaBank in the immediate future, given the hit on capital, but the longer term outlook is positive. Restructuring to be undertaken by both banks will help to offset the problem of low interest rates, which are likely to remain in place for some time.”

Spain’s largest bank, Banco Santander, has so far shown no interest in following the consolidation trend. “We have no plans to participate in any merger process in Spain, where we already have a 20% market share that makes us a strong competitor with the rest of the sector,” says group CFO José García Cantera. “We are more focused on working with our 150 million customers worldwide than in seeking alliances with other banks.” 

He says the pandemic has had an impact on commissions and income, but it has also enabled Santander to boost cost savings. “Last year we reported a recurrent profit of €5bn, down from €8bn in 2019,’ he says. “At the same time, we increased our level of provisioning by €4bn. Santander’s underlying strength is reflected in our capital position, which in 2020 registered a record 12.34% level. That said, we will have to wait some time to be able to evaluate the full repercussions on the balance sheet.”  

Business as usual

Mr Cantera says Spain’s banks have coped far better with the crisis this time than in the 2008 meltdown. “They have been part of the solution instead of part of the problem, and they are working hand-in-hand with the government to limit the impact of the crisis,” he says. “The first half of this year will probably be slower than normal, while the catch-up is likely to start in the second half, with 2022 showing a normal level of activity.”

The banks have revealed themselves determined to soldier on in the spirit of business as usual. This is reflected in Bankinter’s plans to seek a stock market listing for its insurance subsidiary, Línea Directa. In 2009, Bankinter acquired full ownership its 50% Direct Line joint venture with Royal Bank of Scotland for €426m. “One of this year’s highlights will be the flotation of Línea Directa,” says Bankinter chief executive María Dolores Dancausa. “We consider this an excellent opportunity for the bank, as well as shareholders and the insurer itself.” 


María Dolores Dancausa, Bankinter

Bankinter’s net profit for 2020 fell 8.7% to €97m, beating analysts’ forecasts by more than €20m. Ms Dancausa expects to see low-single digit growth in net interest income in 2021, despite the obstacle of negative interest rates in the first half. “If we look at income, NPL provisions and other key figures, the results were better than expected,” she says. “Like us, the banks across the board have set aside major provisions to enable them to confront a potential decline in business activity.”

Jaime Sáenz de Tejada, CFO of BBVA, emphasises the key role that digital technology has played throughout the crisis. “Our first priority in the pandemic was to ensure the safety of our workforce and customers,” he says. “This meant having to reconfigure our business to enable staff to work from home, a task which we achieved a matter of days.” 

BBVA’s client servicing needed to be reoriented by boosting the bank’s digital channels and apps to avoid bottlenecks in its day-to-day transactions. “Our second priority was to offer support to our corporate and retail customers, many of whom were suffering a loss of income,” he says. “We were one of the first banks to guarantee our customer access to lines of credit to help them minimise their capital outflows. We have helped in excess of three million clients by offering debt moratoriums totalling than €38bn, as well as credit facilities through government programmes totalling €25bn.”

Speeding up digital revolution

The effect of Covid-19 has been to accelerate the rollout of the bank’s digital platform by three or four years, adds Mr Sáenz de Tejada. “In 2020, two-thirds of all products and services sold were through digital channels, equivalent to 50% of the total in value terms. We need to be able to access new clients through digital channels. Last year, a third of all new customers were gained digitally — a 56% increase compared with 2019.”

Including one-offs, such as the €2.08bn goodwill adjustment on the disposal of the bank’s US business and net capital gains of €304m from the sale of its non-life insurance in Spain to Allianz, the group’s 2020 net attributable profit fell 62.9% to €1.31bn. “The sale of our US operations has enabled us to generate €8bn in excess capital,” says Mr Sáenz de Tejada.   

Ms Dancausa also puts digital technology in the forefront of efforts to boost efficiency and cut costs. In a country where branch banking was almost a social event, 93% of Bankinter’s clients are now carrying out their operations through digital channels. “The pandemic has boosted our online relationship with the customer base,” Ms Dancausa says. “For instance, more than 40% of sales are done online. We have registered 18% growth in the use of apps by retail customers and 22% by corporate clients.”

The Spanish Banking Association’s Mr Roldán says the crisis has driven the digital revolution and this has enabled banks to cut the number of staff and branches. “This has also significantly enhanced operating efficiency,” he says. “Along with continued emphasis on their IT platforms, there is a good chance we will see more merger activity going forward.”


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