There is an optimistic feeling among the CEOs of Spain's leading banks, as profits and domestic conditions improve. With the European Central Bank's imminent asset quality review expected to be passed with flying colours, the country's lenders are now looking beyond survival and towards growth, both domestically and internationally.

For the first time in years, smiles are in evidence on the faces of the CEOs of Spain's banks. Small wonder, with 2013 results pointing to solid and sustainable profitability in a post-meltdown environment of fledgling economic recovery.

The country's banks have taken heart from modest gross domestic product (GDP) growth forecasts for 2014, ranging from the International Monetary Fund’s prediction for 0.6% (three times what it had forecast in October 2013) to the Spanish government's more bullish 1% estimate. This in turn has encouraged some of the rating agencies to revise their outlook on the country's major banks from 'negative' to 'stable'.

Santander's strength

Banco Santander, the largest bank in the eurozone by market value, kicked off the reporting season with a massive 90.5% rise in net profit to €4.37bn. “After several years of strengthening the balance sheet and capital, Banco Santander is embarking on a period of strong profit growth in the coming years,” according to chairman Emilio Botín. The bank’s results marked a turnaround after years of declining profits.

Erwin Van Lumich, managing director at Fitch Ratings, says that after biting the bullet of restructuring, Spanish banks have positioned themselves for future profit growth. “Spain has experienced a tough economic environment over the past few years and this has had a negative impact on the banks’ results and asset quality,” he says. “On the positive side, after [consultancy] Oliver Wyman’s stress-test in 2013, the banking system and the government have implemented restructuring requirements in a diligent fashion. The Spanish banks are now in a stronger position to weather the still-challenging environment.”

Standard & Poor’s analyst Elena Iparraguirre says that risks in the operating environment in Spain are abating. “In particular, we believe that Spanish banks have made significant progress in structurally rebalancing their funding profiles, a trend that we expect to continue in the context of the stabilising sovereign creditworthiness,” she says. Ms Iparraguirre cautions, however, that real estate prices are likely to fall further this year and in 2015 and activity will remain modest. “However, following the significant provisioning efforts in 2012, we believe that Spanish banks have already recognised most of the credit losses generated by the bursting of the real estate bubble,” she says.

Like its rivals, Santander realised that only by sticking to the knitting – that is, a sharp focus on developing its core business – could it achieve sustainable profitability. “This year is the first since 2009 when all the markets in which we are present will register growth,” says Javier Marín, Santander’s CEO. “Some, like Brazil, might grow below expectations, but this is offset by our unique diversification model. The economic cycle will turn more positive and this will continue to benefit from our broad global diversification.”

BBVA's strategy pays off

Mr Marín’s cautiously focused strategy is mirrored by his counterpart at BBVA, whose net profit last year grew by 33% to €2.23bn. CEO Ángel Cano stresses that his aim is to avoid surprises. “Our first objective is to review the map of the countries in which we operate, from a geographical point of view, and look at any possible gaps in our network. We are constantly analysing potential opportunities that may come our way, and this enables us to have a diversified business model,” he says.

Mr Cano says that BBVA has put a lot of work into developing new technology to ensure the customer receives the best possible service through a network of integrated channels. “Customers can therefore choose which channel to use in their relationship with the bank,” he says. “This does not mean we have turned our backs on traditional distribution channels, only that we are working hard to increase the role of digital channels.”

Over the past three or four years, BBVA has developed a number of requirements for its target countries. These centre on countries with sustainable economic development and a well organised and solvent institutional structure. “What is important is that a country’s institutions are developing properly, irrespective of which party is in power. Another priority is to be in countries where we have the potential to be market leaders and have critical mass. From our point of view, this is something we have been putting a great deal of effort into over the past couple of years.”

Caixa thinks big

Barcelona-based CaixaBank, which has the most extensive branch network in the Spanish market, is also guided by a sharp focus on its business model and has implemented two strategic plans over the past seven years, between 2007 and 2010 and then between 2011 and 2014. CaixaBank recorded a 118.9% leap in net profit to €503m in 2013.

The bank’s CEO, Juan María Nin, says that as a result of strengthening its balance sheet the bank can be confident of holding a leading market position in capital and liquidity. “A second objective is to consolidate our level of profitability, in terms of returns on equity and returns on assets, and we are determined to achieve a strong position in both of these key measures of profitability,” he says. “Another of CaixaBank’s priorities is to reinforce our leadership in the Spanish market, thanks in large measure to the acquisition over the past two years of six domestic savings banks [cajas] and two retail banks.”

These transactions, says Mr Nin, have enabled CaixaBank to boost its market share from 10% to 15% in this period. “By 2015 we expect to have achieved more than €625m in cost savings through these acquisitions, placing CaixaBank at the top of its peer group in the value of its franchise, assets, quality of service and number of customers,” he adds.

Back to health

Banco Popular, the smallest of Spain's big four banks, also bases its strength on well-defined strategy that has remained largely unchanged before and in the wake of the recession. The bank made a €602m pre-provision profit in 2013, a major turnaround from the previous year’s €2.4bn loss. “Our strategy is based on efficiency, solvency and profitability,” says CEO Francisco Gómez. “We will continue to apply these principles in a rigorous fashion. We are convinced that we have a winning business model, one that is focused on financing small and medium-sized enterprises [SMEs] and high-net-worth individuals. This is what most Spanish banks would like to achieve but it is more difficult to break into this market than might be thought.”

Mr Gómez says that Popular’s 11.2% core capital ratio is a measure of the bank’s successful strategy. “Our operating income as a percentage of average total assets is the highest of all Spanish banks and we intend to maintain this lead position, along with a strictly managed and austere policy of costs,” he says.

There even seems to be a glimmer of light at the end of the tunnel for bailed-out Bankia, which was created from the merger of seven savings banks in 2010 and floated on the stock market the following year. It was forced to close 38% of its branches and cut its staff by more than 20% in less than a year. Combined, the banks that merged to form Bankia had the largest property portfolio among Spanish banks when the bubble burst after 2008. 

Spain's economy ministry is believed to have stepped up contacts with bankers over Bankia's possible sale sometime this year of a stake of less than 20% of the bank. The idea is for the government to retain majority control so that the bank's restructuring can be completed by 2017, as agreed with the EU. Bankia has made strides towards restructuring its shattered balance sheet over the past two years. In 2012, the government spent €18bn rescuing its parent, BFA, including €10.6bn that was passed to Bankia. It was the largest bank bailout in Spain’s history. At that time, Spain had to borrow €41.3bn from its fellow eurozone members to recapitalise its troubled banks.

Challenges ahead

In spite of the strong results reported by Spain's big banks, the market sees challenging days ahead, in terms of a further uptick in non-performing loans in 2014, albeit at a slower pace than in the past. Low interest rates are likely to continue to put pressure on earnings, while provisions will remain high, although below levels seen in 2012 and 2013. “We expect to see some stabilisation,” says Fitch’s Mr Van Lumich. "This is also reflected in a recent change in the outlook on our sovereign rating from 'negative' to 'stable', on the expectation of a return to moderate GDP growth. Asset quality and profitability pressure remain the main risks, while funding and liquidity profiles have largely stabilised, also supported by deleveraging in an environment of contraction in loan demand.”

A challenge facing the banks this year is the European Central Bank’s asset quality review. Most analysts are confident that the Spanish banking sector’s major restructuring over the past few years will enable it to pass this latest health test. Thanks to the deep scrutiny the banks have undergone, it is assumed there will be less risk in the sector than in some other European countries. Spanish bankers are sanguine about the outcome of this upcoming test.

“We place a great deal of importance on ethics and from this standpoint, we feel obliged to deploy a moderate risk profile,” says BBVA’s Mr Cano. “The result is that since the start of the recession we have not had to request any government aid and we have continued to pay dividends. When you look at the banks that have had to pay fines, above all in countries that tend to impose huge penalties, BBVA has not suffered any reputational damage, for instance, with regard to toxic products. This is one of the benefits of having a moderate risk profile and a well-defined risk appetite.”

This, he says, is one fact that differentiates Spain from other countries. Spain went through a stress-test and asset quality review in 2013, as a result of which some institutions had to issue capital to raise their capital adequacy ratios. “BBVA has more than doubled its core capital in the past six years,” he says. “Our core capital ratio has risen from 5% to more than 11% under more demanding regulatory requirements. I very much doubt that this year’s asset quality test will bring any surprises for the Spanish banks, and certainly not in the case of BBVA.”

A confident mood

Banco Santander’s Mr Marín shares this view, voicing his confidence that the bank will pass the stress-test “with flying colours”. He adds: “I’m certain the Spanish banks, and of course Santander, will do well.” Mr Marín says one of the bank’s strongest financial pillars is its diversification. On the one hand, this enables Santander to develop in its home market projects, products or services that it offers in other countries. “For example, the group’s best mobile banking service is operated in Poland, so we plan to apply this model to other countries,” he says.

Unlike its competitors Santander and BBVA, CaixaBank still draws the bulk of its earnings from the Spanish market. The bank has Spain’s largest retail footprint, with 5700 branches and the biggest network of ATMs and remote banking. But changes are on the cards, according to CEO Mr Nin. “In the short term, our objective is to continue to grow organically and increase our market share,” he says. “That said, we will of course continue to look at any timely acquisitions which we believe offer synergies and the possibility to enhance our business.”

In the past two years, CaixaBank has expanded its foreign business, with fully fledged branches in Morocco and Poland, while since 2007 it has acquired significant shareholdings in Hong Kong’s Bank of East Asia, Portugal’s BPI, Mexico’s Grupo Financiero Inbursa and Austria’s Erste Bank.

A broad international profile has enabled Santander and BBVA to avoid the worst of the fallout from the meltdown of the Spanish economy. “In the case of Spain, this market accounts for about 15% of net profit, [so] the impact on your profit-and-loss account is far less damaging,” says Mr Cano. “Today, 60% of [BBVA's] gross income comes from emerging markets and the rest from developed countries. We have the advantage of being able to draw on profits from those countries to finance our restructuring and not depend solely on the Spanish business.”

Popular, which in the past was perceived as a purely domestic bank, is making inroads into the international markets. The bank said last year that its target was to eventually derive 25% to 30% of its income from the Iberian Peninsula market. Spain now accounts for slightly more than 90% of its income, another 8% comes from its Portuguese business and 1% from the US. “In the short term, our objective is to develop our Spanish business,” says Mr Gómez. “We will cautiously analyse possible opportunities and partnerships. A first step was Mexico, where last year we acquired 24.9% of Ve Por Más, whose business model is also based on SMEs. Mexico is moreover an underbanked market, in which we can provide our banking know-how.”

For now, however, having just begun to emerge from eight years of crisis, the dominant sentiment among Spain's bankers is one of caution, while reaping the benefits of recovery. “The environment will be more positive this year, but we don’t know to what extent,” says Mr Gómez. “We are prudently optimistic.”









All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter