In the first half of the year we saw a recovery in the Spanish banks’ basic income, interest margin + net commissions. But an acceleration in the deterioration of the return on assets is expected (both on credit investment and fixed income portfolios). Furthermore, the adjustment of liability cost continues to play a crucial role in offsetting this deterioration.
Overall, the Ibex-35 banks + Liberbank’s H1 2015 results were very positive, although this has not been reflected in the stock market’s reaction. These results have shown an improvement or stability in basic income and an increase in net income underpinned by lower credit risk.
For H2 ’15, the correction in the cost of retail and wholesale liabilities will continue to remain the basis of an interest margin which we expect to continue to grow in annual terms, but remain weak on a quarterly comparison basis. And we do not rule out a negative trend.
One positive variable for net income generation is the improvement in credit quality. We are seeing a downward trend in the delinquency rate, lower provisioning costs with some exceptions and, consequently, a risk cost which is falling quarter after quarter.
Although credit granting has accelerated, the new output is not offsetting amortisations, a trend that we expect to be reversed in 2016, making the recovery in volumes more evident.
Looking ahead to 2016, the improvement in the interest margin will be the ‘Achilles heel’ of the banking sector, once the adjustment of liability costs is less acute and everything is subject to an improvement in return on assets and volumes.
To this end, and with the aim of improving profitability, we believe that business activity will be an important factor in the medium and long term to achieve greater diversification either geographically or in the business mix. This business activity suggests a risk of capital increases in a context where we understand that cash will not be the first choice.
We see catalysts for the second half of the year in the banking sector, so we would keep out of it despite recent stock market price falls. We prefer to wait until the doubts about profitability disappear and we see more sustained growth in basic revenues and less reliance on ROF.