Ofelia Marín-Lozano | All the banks have seen a sharp decline in their profitability compared with a decade ago. This is partly due to the heavy provisions made to offset the impact of the property crisis (over 300 billion euros in accumulated terms). But it is also the result of the decrease in pre-provisions operating profit and the requirement for the lenders to raise their capital in line with assets. They have had make capital increases (the number of shares on average have doubled since 2007), with the consequent reduction in earnings per share.
The deterioration in the banks’ pre-provisions operating profit compared with levels before the crisis, with the exception of Sabadell and Bankinter, is very significant. Furthermore, there is the even higher reduction in pre-provisions operating profit per share (the same figure divided by the number of current shares); in this latter case there are no exceptions.
In terms of net profit, there is a clear deterioration compared to pre-crisis levels, with the exception of Sabadell and Bankinter (and the probable exception of CaixaBank, having been able to take into account comparable data from 2007). Since 2012, however, profits have clearly begun to recover. If we look at net earnings per share, no bank has escaped the dramatic drop since 2007. Popular is in the worst position (EPS for 2015 is approximately 5% of what it was in 2007), while Bankinter has the most advantageous position (EPS 2015 is half what it was in 2007). In the case of the two big banks, EPS 2015 is between a third and a quarter of what it was in 2007 (Santander and BBVA respectively), but it has recovered from 2012 (it represented 15%-20%).
Profitability levels in 2007, with ROEs close to 20%, were unusually high, just as the current levels are unusually low, with ROEs below 10%.
The unanimous goal is to achieve double digit ROE, compared with an average 6% currently (which is more than one percentage point higher than that of the big European banks); so the ROE would at least be higher than the callable capital (the Bank of Spain governor recently estimated this at levels close to 8%).
Additional cost cutting can also boost profits (and there is still some way to go for those lenders with a large number of branches or those which have still to complete their restructuring process after recent acquisitions). Improving revenues is a way to achieve a more recurrent increase in profits, although this is difficult in the current very low interest rate environment. Efficiency, economies of scale, focusing on the best clients, building up loyalty and international diversification are the expressions most used by the main sector representatives.
BBVA and Santander emphasise their geographical diversification, while for Caixabank and Sabadell it’s all about capitalising on recent growth. In Bankia’s case, it’s completing the plan outlined in 2012 and for Popular it’s about its leadership in the SME segment.
– BBVA: Like Santander, only 12% of 2015 profits came from Spain (23% excluding its property business), compared with 78% from America (46% from Mexico, 20% from South America, 12% from the US), 10% from Turkey and 2% from the rest of Eurasia.
– Caixabank: It is the largest bank in Spain, with a network of 5,228 branches (it has a branch in 93% of those municipalities with less than 5,000 inhabitants). It has a market share of between 14% and 25% in all its products (higher in the private client segment) and counts almost half of all Spanish companies amongst its clients. Its strategy for growth via acquisitions in the last few years has allowed it to increase its number of clients by 31%, while the number of offices is slightly below that of 2007. After years of growth, Caixabank’s goal is now to maximise its client network.
– Sabadell: It is the bank which has achieved the biggest growth via acquisitions. In 2009-2015 it has multiplied its number of offices by 2.4, its employees by 2.8 and its clients by 5.7. Its last purchase of the UK lender TSB (bought in 2015 for 2.7 billion pounds) accounts today for about a quarter of its results and its balance sheet. It is Sabadell’s most obvious cornerstone for future growth, apart from its goal of maximising value from those clients acquired in Spain over the last decade.
– Popular: Is the leader in the SME segment, with the greatest added value (a quota of 17% according to statistics from the EBA). It continues to capture clients (over 60,000 new clients In 2015 between SMEs and self-employed people). Its client margin in retail banking is the highest in the sector (2.55%)
To guarantee a future improvement in profitability, the Spanish Banking Association has stressed the importance of efficiency and consolidation, as well as its vision of a banking sector which offers services more than products. And where charging for these services will become the norm over the next decade, given the structurally low interest rate environment (an explicit and transparent way of charging for services as happens in other areas).
The need to improve customers’ vision of the banking sector is embodied in the mottos which the lenders have adopted to define their new relationship. “Simple, personal and fair,” according to Santander or “close, simple and transparent,” according to Bankia. Sabadell focuses on the values of “proximity, transparency and simplicity,” while BBVA highlights the “momentum in the small things” and “client experience.” Spain’s second biggest bank measures this factor by using a survey to find out if clients would recommend BBVA to another family member.
New regulatory measures introduced after the financial crisis have practically doubled capital requirements. The sector is now better capitalised and stronger than it was pre-crisis, as well as, out of necessity, less profitable.
But the new regulations are about much more than just capital. The existence of a single supervisor was compared by the chairman of CECA (savings banks association) to the introduction of the euro: a change which implies the same regulations for everyone, quantitative as well as qualitative, with a global perspective which also has hindsight. In conclusion, a tool which will definitively boost confidence in the banks’ balance sheets. After introducing the single supervisor, the banking union still has to implement the Single Supervisory Mechanism and a Single Deposits Guarantee Fund.
Finally, the future Capital Markets Union should facilitate financing in the market and reduce the independence on bank funding. This will allow the European financial market the possibility of operating more like that of the US (20%-30% of funding in the US comes from the banks compared with 80% in Europe).
The sector has been subjected to more, and incomparably stricter, regulation and is calling for the same to be imposed on the new digital market entrants. This will allow them to compete on a neutral basis and protects the end-user. The digital revolution. The Fintechs. There has been a delay in Spain compared with other countries (we have 13 million internet banking users compared with a rate of 57% in the UK or 87% in Norway), but the impact of the technological transformation is undeniable. In the future, there will be a clear increase in services accesible via mobiles: for example, Caixabank already has over 2.7 million clients who use mobile banking services, while in BBVA the number of clients using mobile services increased by 45% in 2015.
As far as new non-banking competition is concerned which, based on technology, offers traditional banking services, it is estimated that there are around 12,000 Fintechs, with a combined accumulated investment of some 20 billion euros. A lot of new ones appear on the scene, but their average life is short. But as BBVA points out, under the premise of “quicker and cheaper,” they attack the value chain in three areas: payments, loans and asset management. According to Sabadell, the important thing about digital transformation is the change in mentality, not systems.
Digitalisation is a transformation process (of methods, back office) which requires a cultural change, but which also needs the branch office. Sabadell believes that it’s difficult to separate digital clients from analogical clients. This is because the majority use tools in both areas (including the millennials, who may use a comparison calculator to get a mortgage, but if they want to start a business they will visit their local bank branch.)