Having already established digital platforms, Spanish banks adapted to the coronavirus crisis quickly. While upbeat they can stay afloat, most are realistic about its effect on profitability. 


José María Roldán, chairman of the Spanish Banking Association (AEB), says that in little more than a decade, the world has witnessed two crises of the sort that used to emerge once in a century. “The current emergency poses an extraordinary test for the economy and the financial system,” he says. “Fortunately, banks are much better prepared today in terms of capital and liquidity to confront this challenge.”

Mr Roldán says until now, profitability was the greatest hurdle facing the global banking system. “This has now become difficult to achieve,” he says. “The banks have no alternative but to continue focusing on efficiency and seeking ways to develop their digital business. In the short term, they will have to focus on absorbing an increase in non-performing loans (NPLs), which in turn will require higher provisioning levels and a reduction in capital. By rebuilding the balance sheet and achieving an acceptable level of creditworthiness, the banks can avoid another systemic crisis.”   

Crisis plan

There is a broad market consensus that attention has shifted to short-term action and the need to implement a strategy to navigate through the crisis. According to Elena Iparraguirre, director of financial institutions at rating agency Standard & Poor’s, Spain may be hit by an 8% drop in gross domestic product (GDP) in 2020, though she says some measure of recovery is likely in 2021.

“However, this will not be enough to compensate for the loss of activity during the Covid-19 outbreak,” she says. “We were previously forecasting a reduction in NPLs for this year and the outlook was for satisfactory, if not spectacular, results for 2020. The banks are likely to report close to breakeven figures and some smaller banks might have to absorb small losses. We have now seen the emergence of asset and profitability problems. There is a need to increase provisions for consumer lending and small and medium-sized enterprises (SMEs), though we believe mortgages will remain resilient.”

Ms Iparraguirre says credit provisions will increase in 2020 and, with profitability under pressure, results will not meet the cost of capital. The banks are likely to report close to breakeven figures and some smaller ones might have to absorb small losses. For larger banks, there will be a significant reduction in the bottom line but they should be able to maintain the same level of capital as seen at the end of 2019. In some cases, profitability could be halved; and there will not be a dividend pay-out this year.

Moody’s senior vice-president María Cabanyes says one problem is that Spain relies more on net interest income than many of its European peers. The average for EU banks is close to 60%, while in Spain it is 71%.

“On the positive side, banks have been making strides to achieve efficiency gains by cutting their cost base. Operating costs are on average lower than in other European countries,” she says. “Spain’s 53% level compares favourably with 72% for France and 84% for Germany. One factor that accounts for this is sector consolidation in recent years, which has enabled the banks to reduce staff numbers and focus on mergers and acquisitions to achieve greater efficiency.”

Moody’s senior credit officer Alberto Postigo says: “Spanish bank margins have so far remained resilient because the decline in loan yields has been largely offset by lower funding costs. That said, we have seen net interest income drop as a consequence of lower business volumes. There is concern over the limited scope for further cuts in funding costs, especially as banks issue minimum required eligible liabilities-compliant debt instruments, which typically carry higher yields.”

Change in priorities

Bankers agree that whatever the future holds, the coronavirus pandemic almost overnight brought to the fore the importance of having in place a vigorous digital system to serve their customers.

Mr Postigo says that digital banking penetration is progressing in Spain, albeit at a slow rate compared with the rest of Europe. On the positive side, he says Spanish banks enjoy high customer loyalty, which gives them some flexibility and extra time to meet customer demands for online services and respond to competition from new digital entrants.

“The alarm bells began ringing on March 14, and that marked a radical change in our lives – including, of course, that of the bank,” says Bankia’s chairman José Ignacio Goirigolzarri. “Our internal services quickly turned to operating online, while at the same time we decided to keep 90% of our offices open.”

Mr Goirigolzarri says the crisis brought on a radical change in commercial priorities and products. Like its peers, Bankia has found itself more reliant than ever before on digital channels to provide customer services.

“We have introduced major improvements in our technology,” he says. “Three years ago, we began working on a model to increase the number of staff working digitally with customers. The majority of our administrative staff work in the Madrid headquarters. If we had to maintain two-metre social distancing, we would be unable to accommodate more than 40% of our workers. This means that the online business model and telework are here to stay.”

Spain could be hit by an 8% drop in GDP in 2020, according to Standard & Poor’s

Digital advantage

Peio Belausteguigoitia, head of BBVA Spain, believes it is still too early to assess the full impact of the pandemic on the bank’s business, but he stresses that BBVA reacted quickly to the crisis. “In order to preserve the health and safety of our employees and customers, and therefore of society in general, while continuing to provide an essential service, we kept 30% of our branches open, with 90% of our sales force serving our clients remotely during the period of confinement.”

He says this was made possible by the bank’s investment in digital technology, which is now used by 65% of its customer base. In the first two months of the pandemic, BBVA added 150,000 new customers to its digital platform. On the other hand, some areas such as new mortgages, personal finance and credit card purchases have been affected. Business has been positive with other customers, such as the self-employed, SMEs and large companies.

“I would say that digital banking has been a crucial factor in weathering this storm,” says Mr Belausteguigoitia. “Our digital customers have expressed a high level of satisfaction with the system. The stage of building up servicing and transactional functionalities is well behind us and thanks to the development of new features based on data analysis, our clients already enjoy a fully digital advisory experience.

“In this way, we can offer a wide range of personalised services to help people with their day-to-day financial decisions and longer-term plans, such as retirement, investing for the future and major purchases. Our clients can automate many daily financial tasks, such as transferring funds from one account to another, on our platform. If one account shows an overdraft, for example, funds are automatically transferred from another to fill the gap.

“Over the past two years, we have leveraged the success and insight of our retail platform to develop a better user experience for the corporate sector app and website by adding some really useful advisory features.”

Offering continuity

Caixabank, Spain’s largest domestic bank in terms of its 15.1 million customer base, says its digital platform prepared it well to meet the crisis. “We kept 92% of our offices open and our employees were able to continue serving our customers through our digital channels,” says chairman Jordi Gual. “Almost 65% of our customer base now uses our digital platform. We are leaders in this segment of the business, with 33% of Spanish online users banking with us.”

Mr Gual says one of the most successful of the bank’s recent digital initiatives is In Touch, introduced more than two years go. “This channel allows customers to touch base with staff by videoconference to carry out all types of transactions,” he says. “We now have 14 of these centres in operation in Spain and we have seen that customers, who now number 1.3 million, as well as staff, are highly satisfied with the system. Our goal is to digitise the full range of our end-to-end back office processes.”

Banco Santander is another major bank that has put digital technology in the front line in its battle against the coronavirus pandemic. Group chief financial officer José García Cantera says one of its chief competitive advantages is its ability to work remotely.

“Most of our employees are currently working online, which puts into perspective the bank’s ability to react quickly,” he says. “Our objective at this moment is to speed up the transformation of our digital business, which enables us to reduce costs and provide more services to our customer base.” 

Quick action

Cristina Torrella, senior director of financial institutions at Fitch Spain, says, so far, Spanish banks have quickly transformed front offices to offer services through new channels, against a backdrop of fast-growing online banking penetration in Spain. “However, the transformation of back offices will take more time and entail significant investments. Large banks are more advanced and better placed to afford these investments,” she says.

Some smaller banks would argue that they, too, have taken on board the need to roll out a vigorous digital platform for their customers, especially since the pandemic outbreak.

“One of our main competitive advantages is efficiency and we have achieved this by placing ourselves in the vanguard of new technologies,” says Bankinter CEO María Dolores Dancausa. “This crisis will accelerate many changes in areas that were already in development, such as digitisation. It is crucial for companies to reconfigure their business models in order to adapt to what lies ahead, until we see the end of the pandemic and beyond.”

Ms Dancausa defines the ability to remain efficient and in the forefront of IT implementation as "a live-or-die matter" for the bank. “We have been pioneers in Spain, and I would say Europe as well, in the application of technology to banking,” she says. “More than 93% of our customers now use these systems on an exclusive basis or in combination with other channels. This is why Bankinter, with fewer than 360 branches in Spain, enjoys the sector’s highest level of profitability.” 

Consolidation likely

One upshot of the current crisis may be a round of consolidation among Spanish banks. This would affect the smaller players, who lack the muscle to withstand a prolonged downturn. Fitch’s Ms Torrella believes this will need to happen, in some form, in an environment of low interest rates, demand for large outlays on IT development and regulatory pressures.

“Some banks are making use of available levers such as revenue diversification and cost cutting, but the situation cannot be sustained for too long,” she says. “The medium-sized banks are the most likely candidates. Some of the issues preventing consolidation to happen so far had more to do with valuation or pricing disagreements between banks. Governance considerations or restructuring processes entailed in a potential merger could also be detracting factors.”

The latest attempt at a merger in the sector fell apart in May 2019 when Liberbank and Unicaja, two former savings banks, said they could not reach agreement over the terms of a share swap. At the time, the deputy governor of the Bank of Spain, Margarita Delgado, said mergers were a clear way to improve profitability and efficiency in the sector. So far, bankers have downplayed mergers as a tool for strengthening their market position.

Bankinter’s Ms Dancausa says the bank’s strategy is focused on organic growth. “We foresee no changes to that policy in the coming years,” she says. “We believe that the income streams in which we have diversified our business have the potential to ensure continued growth and market share in all segments. It would be difficult to find an ideal partner for Bankinter whose return on equity (ROE) would come under pressure through a merger.”  

Her words are echoed by CaixaBank’s Mr Gual, who says the group’s strategy remains focused on organic growth. “However, if this crisis sets off a wave of consolidation among smaller and weaker players, we would consider analysing any operation that might fit our business model, though this is not a priority,” he says.

Other bankers have voiced their lack of interest in acquiring smaller players, but also with the caveat that they would examine the merits of any target that came on the market, with several mid-size entities expected to arise as the sector struggles with the costs of rebuilding the business.

International options

Having international operations – most conspicuously in the case of Santander, whose diversification is broadly balanced between mature and emerging economies – have proved to be an effective strategy to offset pressures in the domestic market. Mr Cantera explains that when the lockdown came into force, the impact of the pandemic varied according to each country and business segment in which Santander operates.

“SME business grew with the support of government aid programmes and we have witnessed, in some cases, the highest level of activity since 2009,” he says. “Our consumer business has suffered, but more in Europe than in our Latin American operations. The fact is that at the end of May, we have seen a rapid recovery in most countries on average for March. In Spain, mortgage lending has held up well. Much of Santander’s resilience can be attributed to our geographical diversity and the products we can offer out 146 million customers worldwide.”

BBVA’s Mr Belausteguigoitia says having a global footprint is a strong competitive advantage. “We have adopted the unique BBVA logo and brand in all locations where we operate, rather than differentiating them by country, so that customers worldwide benefit from the same level of service and experience,” he says.

He adds that this has provided a boost to the bank’s financial position. In the first quarter of 2020, BBVA reported a net margin of €3.56bn, the highest for the bank in the past 10 years.

“Our capital reserve has more than doubled since 2008 and even in a zero or, in some cases negative, interest rate environment, at the end of 2019 we were able to report a ROE of 9.9%, which compares favourably with an average of 5.9% for our European peers. In short, we face this situation from a position of strength that allows us to be part of the solution to the crisis.”

The question is how long it will take to return to the growth level of December 2019... for most of Europe it will be a two-year recovery process.

Profitability challenge

The low interest rate environment that banks have had to endure for the past several years shows no sign of being relaxed, especially now when the global economy is about to face one of the worst recessions in living memory. Santander’s Mr Cantera sees GDP dropping by 10% to 12% in most countries.

“The question now is how long it will take to return to the growth level of December 2019. The Anglo-Saxon countries might achieve this in one year, but for most of Europe it will be a two-year recovery process,” he says.

Bankia’s Mr Goirigolzarri says the most difficult scenario today is how to achieve an acceptable return in this environment of zero or negative interest rates. “All banks are facing the challenge of how to minimise the impact of growing NPLs and deal with a drop in profitability. We need to focus on improving our efficiency and keeping the cost of risk at a minimum. This is a gradual process, but we have no other option,” he adds.

Bankinter’s Ms Dancausa also believes that one of the hardest tasks will be maintaining profitability. “We have confronted this by using risk-adjusted differentials in the lending business, boosting loan volume and orientating the business towards services and products that are attractive to our customers, thereby ensuring an acceptable level of fees,” she says. “As a result, our gross margin figures have been able to weather the storm and continue to grow at 6% per year, to surpass €2bn in 2019.”

Spanish bankers moved quickly to tackle the challenges brought on by the pandemic. Before the coronavirus outbreak, banks had basically been doing two things to bolster profitability. They were reinforcing their fee-earning  businesses, like the sale of asset management or insurance products, and were also targeting greater efficiency by reducing the size of the branch network and workforce, for which digitisation has proven useful.

A sombre outlook

However, the need for sizeable investments in technology for several years to come means efficiency gains are unlikely to materialise any time soon. The key questions now are how long the crisis will last and what will be its longer-term impact on the banking sector, as well as the broader economy.

Marco Troiano, executive director at Scope Ratings, believes the crisis will undoubtedly add to the challenges, though Spain’s banks face this from a position of strength. “The previous crisis flushed out a lot of excesses from the system, triggered consolidation and cost-cutting, while Basel III resulted in material improvements in the quantity and quality of bank capital,” he says. “The key downside risk is on the shape of recovery, especially if the economy suffers a second lockdown, possibly as a result of a second infection peak.”

CaixaBank’s Mr Gual underscores the importance of contemplating the future with realism. “This crisis has placed the economy of Spain and the eurozone on ice,” he says. “If the defrosting process is quick, there will be a rapid recovery. If not, the impact will be more severe. As things stand now, it is reasonable to assume it will take between 18 and 20 months to return to normal levels of economic activity.”

“The coronavirus pandemic has brought a radical change to the banking industry,” says the AEB’s Mr Roldán. “It hit us like a meteor falling from the sky. We could never have imagined so complex a scenario. Spanish banks’ 2019 ROE came in slightly below the cost of capital. At the time, this was a matter for concern but it now looks marvellous compared with what awaits.

“This crisis is a good deal more complex than the financial meltdown of 2008. It is looking more like the crash of 1929 and all we can say with certainty is that there is no early way out. It will be a heavy burden for the banks to bear in the short term. We used to speak of interest rates being lower for longer – now it is lower for even longer.”


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