This diabolical loop is the result of adverse conditions in the real economy and low profitability in banking balance sheets. How can we get out of this vicious circle? With constant GDP growth for a period that allows an improvement of the real economy. Spain will grow at 2% in 2015 at best, but with very high levels of public and private indebtedness, and an unemployment rate above 23%.
Economist Emilio Ontiveros says that the interests of the banks now increasingly coincide with the interests of the unemployed. In order to make the banking system more profitable, it is essential to reduce the number of those out of work.
Spanish banks’ ROE (return on equity) was at 4.5% by the end of 2013, which was not enough to cover the capital cost. Market watchers at Afi forecast a slight improvement of up to 7% by 2016 –far from the 20% reached during the years of the real estate boom.
Some banks, such as Santander or Bankia, estimate that their profitability will be close to 10% in 2015. Other entities, such as BBVA, are more cautious and forecast a 10% rise within the next two or three years.
A credit increase is essential in gaining an improvement in ROE levels. Large entities have been saying for months that they have interesting loan programmes for SMEs, but the truth is that new concessions will not make up for the repayments. The regulatory uncertainty does not help either –constant requests for capital increases are undoubtedly hampering the situation
And, finally, there is the issue of solvent demand. José Ignacio Goirigolzarri, chairman at Bankia, says that credit demand is used for working capital rather than for investments in important projects.
If credit levels keep falling and rates remain close to zero, the banking system must focus on efficiency. The sector has already overseen a deep adjustment, but it could be better still. Lower liabilities costs, lower provisions and new liquidity injections by the ECB will help, but they won’t be enough to sufficiently improve the profitability of Spanish banks.