Spanish Banks Still Reducing Their Balance Sheet, To 224% of GDP from 234% Last Year

Santander’s 2H18 attributable profit rises by 4 %Banco Santander presented on Wednesday its 2H18 results

Since the second quarter of the year, results of the Spanish banking sector have been substantially affected by the resolution and sale of Banco Popular to Santander in June. As a result of the transaction, Banco Santander announced losses of € 12,128 million in Banco Popular, subsequently increased to €13.560 million. This is the main reason for the net after -tax loss of €3,920 million posted by the sector as a whole for 2017, compared with the profit of €6,003 million in 2016.

Revenues remain weak, basically due to the interest rate environment and the deleveraging of the private sector. Total revenues fell by 3.5% in 2017. The strength of fees and commissions (up by 6.2% for the year) was not enough to counteract the 4.4% fall in the net inter est revenue and the 10% decline in trading gains and other income.

Operating costs remained under control, although they increased slightly (by 1.1%) over the course of the year, due in particular to the 2.3% increase in general costs, which in turn was pa rtly due to the costs of integrating Banco Popular into the Santander Group. As a result of these movements in revenues and expenses, the system’s cost-to-income ratio deteriorated to 57.1% and the pre-provision profit fell by 9%.

Provisioning increased by 65% in 2017 and “other income ” showed a negative balance of €11,586 million. Several effects of the Banco Popular resolution were recognised under these headings: 1) losses of €7.8 billion on write- downs of real estate assets; 2) non- monetisable deferred tax assets of €982 million; 3) €1,137 million of goodwill impairment ; and 4) an adjustment of €400 million in Banco Popular ’s held- to-maturity bond portfolios.

Activity

With data to February 2018, the balance sheet of the system held practicall y steady in year-on- year terms, totalling 224% of GDP (234% one year earlier). The number of employees and bank branches in the system continues to fall (by 31% and 40% respectively from the highs of 2008). Lending to private sector residents continues to decrease in year-on-year terms (this is analysed in greater detail below), as does the volume of fixed income portfolios. On the other hand, there were increases in lending to non- residents, equity holdings and in particular interbank lending (including the liquidity provided by the ECB) , which was up by 42% relative to February 2017, but down 11% since last December.

On the liabilities side, the volume of banks’ outstanding debt at the end of February 2018 was up by 16.5% YoY, although practically unchanged from year -end 2017 at 8.6% of the balance sheet total. Sight and term deposits at the same date were down by 1.9% YoY. Once again we are seeing the shift from term deposits to sight due to the low level of remuneration. Recours e to ECB liquidity follows the trend of previous quarters, with an increase of 13.5% YoY as at the end of March 2018. As for the cumulative volume of equity in the balance sheet (capital plus retained earnings ) it is 27% more than at the onset of the crisis in 2008.