The necessary adjustment to Spain’s banking system

Spanish banksBank of Spain

Maximising profits is the main objective of any company and the banks are not alien to this situation. The current scenario is particulary challenging for the profitability of the sector in Europe. According to Intermoney’s analysts the adjustments made by the Spanish banks are proof of this. “Irrespective of the implications of tighter regulation or the blow dealt by the latest ruling on “floor clauses” in our country, there is another reality which is just as worrying. Namely the limitations on generating new business, ” affirmed.

The capacity for creating new business in the households’ segment is limited, as is the case with non-financial companies. Once again, we can see from the amount of new transactions that the banks are ready to lend. Loans up to 1 million euros, which would include those given to SMEs, grew 12.9% in 2015 and 23.1% from 2013, with this dynamic trend continuing at the beginning of 2016. New lending to SMEs is progressing at a brisk pace, but it is not managing to  offset amortizations. And there is also a new problem in the form of specialised funds looking to move into the business of financing these companies. Banking disintermediation is a huge challenge which becomes even more so the bigger the company.

In the business world, the crisis was a reminder of how important it is to have diversified funding sources and maintaining access to the markets became a type of strategy.

This is still very much the case and large companies substitute banking loans with cash calls on the markets. It’s significant that new loans to companies for over 1 million euros only rose 7.9% last year, remaining well below the figures for previous years. The competition in this area is growing and the ECB’s corporate debt purchases, despite being focused on investment grade bonds, will strengthen and facilitate cash calls. How to maintain the volumes of past years has become an extremely difficult question, underscored by the moderate growth rates worldwide which reduce the number of attractive investment options for companies. 

At the same time, Intermoney said that the new interest rate scenario predicted by the ECB clashes with the limitations on transferring this new situation to retail liabilities, while the return on assets continues to drop. Traditional business is not a panacea for the banks and eurozone monetary policy has meant that the relationship between the return and the risk on many assets does not compensate for betting on financial investments.

Frankfurt looks at the European banks out of the rear-view window, defending the improvement in margins in the recent past. But they forget that it’s the future which is important and this puts significant pressure on the lenders. In 2015, in the case of Spain, the transfer of a traditional customer’s positions from time deposits to a current account contributed some key basis points to the bank’s margin. However we can’t count on this effect in the near future and the narrowing of the interest margin will intensify.

Furthermore, they add that if it wasn’t enough, neither can we forget that the Spanish banks will have to continue to eliminate their past excesses. The non-performing loans’ rate has fallen by 3.5 percentage points from its highs to 10.2% in January. But bad loans still total 133.422 billion euros, without taking into account the nearly 80 million euros in foreclosed assets.

Faced with this scenario, the most logical and normal thing is to take another look at costs to increase efficiency. The announcements over the last few days are another step in a tough process imposed by circumstances, but also boosted by the population’s new habits, which means the biggest changes will happen in commercial banking. But they won’t be the only ones. The digitalization of the financial sector is a reality and the decline in the flow of clients to bank branches is a constant, aggravated by a preference for more flexible channels supported by new technologies.

The debancarisation of some financial services is a phenomenon which also goes against models with large commercial networks.  The commercial network will be much smaller in the future and it will provide more value-added services, even as far as consolidating its role as an advisor on matters not just related to banking business, as happens in country branches.

In the short-term, however, and keeping this more traditional model in mind, we need to acknowledge the existence of a niche in the market where proximity and visibility is valued. Therefore the evolution in the number of branches will not be the same for all the banks, although in net terms they will continue to decline.

The number of branches reached record highs of 45,707 in Q3’08, and since then the closures have been constant. At end-2015, there were 30,921 branches.

The number of banking branches in Spain is substantially higher than the European average, but the results of the rationalisation strategy are now visible in the statistics. For example, deposits per branch (36.79 million euros) have doubled with respect to what was usual in the first 10 years of this century, while efficiency ratios are better than in the past. The economic recovery has also been favourable, underpinning the profitability of the national banking business. In December 2015, its ROA was 0.42% and ROE was 5.62%.

The ROA and ROE figures of 0.77% and 11.61% respectively over the period 1999-2011 are a thing of the past. The future goal is to defend profitability.

*Image: barriosdemadrid.net