Miguel Navascués | The depression and the drop in inflation -or even deflation- have led the central banks to try a disastrous experiment: negative interest rates. Even Christine Lagarde speaks of putting the reference interest rate at -2%. This has been a mistake for several reasons. It discourages the holding of liquid deposits (which logically yield zero or negative), but it does not make people anticipate consumption, if prices stagnate or fall.
In February, Liberbank and Unicaja concluded possible merger contacts after failing to reach an agreement about the likely distribution of the shares of the new entity, but now the integration of both banks would give rise to the fifth lender in Spain in terms of asset volume, with €98.6 Bn (€56.7 Bn Unicaja and 41.95 Bn Liberbank). Net profit would reach €102 M in H1’20 (€61 M UNI and €41 M LBK). The new bank would have a network of 1,607 branches (1,028 UNI and 579 LBK) and 9,942 employees (6,274 UNI and 3,668 respectively).
Spanish banks have made drastic efforts since the financial crisis to improve efficiency. They were among the most active in Europe to adjust their branch networks. But while the number of branches has reduced in many countries, the workforce has not always followed the same pace of adjustment. For analysts at Scope Ratings, there is still room for efficiency gains, particularly as digitisation continues. “Transition in Spain can only accelerate, leaving room for consolidation”, they say.
Spanish banks recorded aggregate attributed losses of 11.531 billion euros in the first half of 2020. This came in the wake of an effort in terms of provisions and write-offs to the tune of 26.518 million euros. Preparation for the economic impact of the Covid-19 pandemic was behind this effort, according to the Spanish Banking Association (AEB).
EU agreement on a pandemic fund boosted market and regulators’ wishes to move towards cross-border consolidation among European banks- the ECB’s vice-president, Luis de Guindos, has already warned of the need for the sector to continue with the merger process. Scenarios have started to be built again about who should be merging with whom. But unity around the EU pandemic fund is not about banks, say analysts at Scope Ratings.
The market capitalisation of Spain’s six leading banks has slumped by approximately 53.11 billion euros. All the lenders recorded declines in their share prices, which ranged from 39.3% for CaixaBank to 54.9% for Banco Sabadell. The combined market capitalization of the six banks at the end of the first half was 76.398 billion euros, compared to 129.509 billion end-2019.
The Bank of Spain has decided to maintain the counter-cyclical capital buffer applicable to credit exposures in Spain at 0% during the third quarter of the year. It will probably also do the same in the coming quarters due to the current context of the coronavirus crisis as the severe macroeconomic and financial impact of the Covid-19 crisis require credit institutions to maintain the flow of financing to the real economy. The aim of the counter-cyclical capital buffer is to reinforce the solvency of the banking system in phases of excessive credit growth.
The sale of non-performing loans (NPLs) in Spain totalled € 22 billion in 2019, 63% lower than the 60 billion registered the previous year, according to data from Prime Yield’s ‘Keep an Eye on the NPL & REO Markets’ report.
The Mortgage Loan Reference Index (IRPH) represents approximately 10% of the loans granted in Spain and is the most used for Spanish mortgages after the Euribor, used in 90% of contracts. The Court of Justice of the European Union (CJEU) has left it to Spanish judges to analyze, on a case-by-case basis, whether the banks commercialized their mortgages referenced to IRPH in a transparent manner. They will be able to cancel them if it is found they have been abusive.
The credit quality of Spanish banks looks solid, despite the pull-back in reported profits. Solvency ratios sitting comfortably above requirements offer greater leeway for capital distribution and will result in higher returns, benefiting investors, says Scope Ratings. Spanish bank creditors should see the banks’ improved capital-generation capacity as a sign of strength, even if capital ratios have peaked for this cycle.