The Bank of Spain’s (BoS) Financial Stability Report usually puts its finger on the problem when it highlights the main risks affecting the banking business. As well as low interest rates and the deterioriation in both Spanish and global economic prospects, the BoS’ latest report points to another factor which has not warranted so much attention: the decline in the prices of financial assets, both in fixed income securities and equities.
The institution is worried about sovereign bonds’ high valuations. Prices are at maximum levels – and yields below minimum levels – due mainly to the ECB’s asset purchasing programme. And it warns about the numerous risks on the horizon: Brexit negotiations; various election dates and the problems of security and their possible impact on brokers’ confidence. If some of these risks were to materialise “prices would fall” and the correction would bring with it “asset deterioration and worse financing conditions.”
The Spanish banks would be particularly sensitive to any deterioration in fixed income assets because of the large amount of sovereign debt in their portfolios, although that has diminished over the past months. According to the BoS, the volumen of sovereign debt held by the European banks is on average 11.5% of its total exposure, compared with 13% in Spain’s case.
The exposure of this portfolio to national debt with respect to total sovereign debt exposure is also almost ten percentage points higher than the average in the case of the Spanish banks: 56.9% versus 47.8%.
The lenders’ profitability continues to be hit by the pressure from low interest rates on their margins. This, combined with the ongoing decline in lending and a high volume of unproductive assets (199 billion euros at end-June), has led to ever-decreasing profitability levels (on average they are already below 6%).
So what is the BoS’ prescription for this bleak panorama? The same as always: increase efficiency by cutting costs (more lay-offs and branch closures); look for alternative resources and, in certain cases, possible corporate transactions. This last point requires some explanation: the ECB’s Single Supervision Mechanism is betting on cross-border mergers and advises against weak lenders teaming up. Does the Spanish banks’ supervisor hold the same view?