The increase is due to a combination of factors: a decline in banking delay, the reduction in liability costs and operating expenses and, to a lesser extent, an improvement in financial transactions and a rise in commissions (+3.2%). But experts warn that most of these factors have a limited impact.
The fall in endowments will not last over time, while the deposit rate cannot be cut further at this stage. It now stands at an average 0.6% and will drop further. Furthermore, financial operations are no longer the manna of the past few years when all banks resorted to the carry trade: buying Spanish debt at 1% interest in the ECB and then selling it in the market at 4%. An excellent business.
Banks live off their ordinary activity, which is basically granting loans and charging commissions. New credit has grown slightly, especially to SMEs, but not across the board.
Santander expects to see aggregate credit growth in 2016, but not everyone is so upbeat.
The battle for banking assets is another factor which will have a negative impact on the lenders’ income statements. Former BBVA CEO, Ángel Cano, argues that there are some banks which are already lending without covering the cost of capital. And this can be a dangerous strategy for the sector as a whole.
Banking chiefs transmit different messages about the sector’s situation, depending on whether they are speaking in public or in private.
Optimism is the public message: earnings growth, a fall in delays, increases in net interest income, a reduction in operating expenses and, as the icing on the cake, Spain’s economic momentum.
But in private they focus on the uncertainties: the difficult environment for the retail banking business in a country with a 23% unemployment rate, the continued high leverage levels and strong regulatory pressures.
Furthermore, although Spain’s economy is improving, growth is due more to external factors such as QE, falling oil prices and the euro depreciation.