The credit quality of Spanish banks looks solid, despite the pull-back in reported profits. Solvency ratios sitting comfortably above requirements offer greater leeway for capital distribution and will result in higher returns, benefiting investors, says Scope Ratings.
Spanish bank creditors should see the banks’ improved capital-generation capacity as a sign of strength, even if capital ratios have peaked for this cycle. Despite headline declines in net profits for the major groups, full-year results were solid, held down by sizeable goodwill impairments, lower trading gains on ALCO portfolios and integration-related restructuring charges. Against a backdrop of heightened challenges for net interest income, results showed good progress on commissions, costs and asset quality.
“Stable or growing dividend payouts are testament to managements’ optimism with respect to underlying P&L trends, as well as comfort with respect to capital positions,” said Marco Troiano, deputy head of Scope Ratings’ financial institutions team. “Dividends and buybacks are rarely good news for creditors, but they at least signal that supervisors are at ease with bank stability. We see this as a strength – not a weakness.”
Beyond profits, capital formation will remain strong this year, from one-off items such as the sale of insurance company CASER. The regional banks will benefit from the renewal of distribution agreements with the insurer, as they will receive upfront payments. However, such agreements could be a poison pill for banking consolidation, as their resolution would add to integration costs, discouraging suitors.
Regional banks are cooling for now on the consolidation story, following a series of unsuccessful attempts in 2019. “In the short run, increased dividend payouts and buybacks coupled with shareholders’ desire to retain control will likely counter the supervisor’s gentle pressure for more deals,” Troiano said.
“But while a strategy of splendid regional isolation may be effective in the short term, it is risky. In a consolidated market where larger competitors are taking full advantage of their scale to invest in digital capacity, regional banks could gradually lose their appeal,” Troiano cautioned. “We continue to see consolidation between regional banks, or into larger players, as the most likely outcome.”