Outlook for the banking sector, according to BBVA Research

The evolution of Spain’s banking sector

One of the trends BBVA Research underscores is that new credit to households and SMEs continued to grow in 2016 even though outstanding loans continued to fall.  The volume of NPL rose slightly in October after 34 consecutive months of declines. Spanish’ banks’ profitability remained weak, but the sector’s solvency was on the rise. And net profit for the first nine months of the year was €8.29 billion – up 16% year-on-year.

In comparison to Spanish banks’ international rivals, BBVA Research shares the main conclusions from data analysis of the European Banking Authority’s Risk Dashboard, which determines the average for the 158 of the main banking institutions in the EU. The latest data is from June 2016. It shows that since late 2009, Spanish banks are less leveraged than their European competitors (total liabilities over capital in the balance sheet). Figures show a 39% increase in equity on the balance sheet. Efficiency levels are also 12.2% higher than the average for European banks.

How have low interest rates affected Spanish households?

According to the report, the interest rates have had both positive and negative consequences. “In general terms, Spanish households have benefited from lower interest rates for loans. This was especially true for variable rates, where households benefited from the falling Euribor, after some time. However, they have also been adversely affected by lower yields from their savings.”

BBVA Research explains the variation in households’ net financial burden from 2008 to 2016. They maintain that Spanish households have largely seen an increase in their net financial income due to the combination of deleveraging with lower interest rates, although this was offset by lower profitability for their deposits.

A look at the European financial system

The report also examines the status of Portuguese banks - relieved because the rating agency DBRS did not downgrade Portuguese sovereign debt to junk bond status. It notes, however, that “Portuguese banks are still not stable and their situation depends on Portugal’s economy doing well.”

In the chapter on regulations, the biggest development at the end of the year was the legislative package the European Commission presented in late November. This proposal aimed to “amend the current prudential and resolution frameworks for credit institutions,” according to BBVA Research. This amendment also includes the implementation of several international standards into EU law. A legislative proposal was also released to harmonize credit hierarchy of senior debt across the EU.  The negotiation period is expected to last about one year before a final text is approved.

BBVA Research feels that the Commission’s proposals “represent a comprehensive, thorough review.” They also add that the “adjustments made to reflect European specificities are welcome” and that “clarification of the new Pillar 2 framework is very positive as legal certainty was needed.” The report recalls that “This legislative proposal already includes some of the standards that have been discussed under the review of the Basel III framework.” And add that: “The rest of the elements of the so-called Basel IV remain under discussion by the group of governors and heads of supervision (GHOS) and will be implemented into the European framework once an international agreement has been reached.”

All of this takes place within the framework of the European banking union, and the transformation process that has been underway in the European banking sector since the 2008 financial crisis. According to BBVA Research, “While Banking Union has been a significant step forward for European banking systems, some of its effects will cease to be noted when all pending measures have been implemented (such as the creation of common deposit insurance for the Banking Union), when some time has passed to allow the measures in force to bear fruit or when economic recovery means that all benefits can be reaped.”

In this regard, the 2016 Banking Outlook maintains that: “Ideally, real banking union would include transnational bank mergers. If the obstacles to setting up in other countries could be reduced and the regulatory framework standardized, it would be reasonable to expect that those banks in the best situation would want to expand in order to operate in other markets.”