2013 profitable for Spanish banks

Spanish banks will pocket this year much bigger profits than in 2012. The reasons are simple, but nevertheless give sound grounds to optimistic forecasts.

For instance, there is the fact that the Spanish lenders are paying back large sums towards reducing their debt with the European Central Bank, after having used its long-term refinancing facilities to receive credit at a low cost. Why would Spanish entities settle up their accounts? Because they spent those funds mostly purchasing Spanish sovereign bonds, which at that time had very low prices or in other words very high internal rate of return.

Market pressure right now has relaxed over the country’s public debt and it seems to be a good moment to sell part of their bond holdings to cancel ECB loans. This sales have brought in substantial capital gains, strengthening financial entities’ balance sheets.

On the other hand, there is the recent policy of the Bank of Spain to restrain interest rates on bank deposits, which had been increasing of late to entice savers and attract more cash. The situation had led to a sort of ‘war’ in the sector, meddling with a healthy environment of fair competition. This, too, will become an injection of profits into the banking industry.

And last but not least, a reminder: in 2013, there will be no need to rebuild reserves and guarantees because banks already made that strenuous effort a year ago, cutting massively down the entities’ balance.

The picture, overall, is quite bright.