Bank profitability in Spain: A debate in need of perspective

Bank profitability in Spain: A debate in need of perspective

Fecha: marzo 2023

Santiago Carbó Valverde and Francisco Rodríguez Fernández

Bank profitability

SEFO, Spanish and International Economic & Financial Outlook, V. 12 N.º 2 (March 2023)

The Spanish banks announced record earnings growth in 2022, in tandem with the ongoing process of financial normalisation, in which interest rates increased, after years in negative territory. Spain’s top three banks reported aggregate net profit of 19.17 billion euros last year, up 6.1%. Looking at the six largest banks, that figure rises to 20.85 billion euros. Although the absolute figures are eye-catching, it is important to note that they remain below 2007 levels. More importantly, this solid performance comes a time when the Spanish banks, along with their European peers, continue to face difficulties in increasing their earnings per share. The European Stoxx Bank Index contracted by 7% in 2022 with the vast majority of the banks trading at P/BV multiples of under 1x. Moreover, the banking business is facing challenges on the demand side. Household borrowings increased by just 0.3% year-on-year in January 2023, while corporate borrowings contracted by 0.7%. Fundamentals for 2023 do not point to significantly higher credit growth. Going forward, it will be key to consider a broader spectrum of factors in order to bring more perspective to the interpretation of banks’ profitability. Those factors include the considerable structural changes unfolding in recent years, such as complex mergers, sometimes taking place over a brief time span. As well, the balance between the volume of financing extended and deposits captured has improved relative to during the financial crisis, with the loan-to-deposit ratio at around 1x today, compared to 1.6x in 2007. Finally, solvency too has improved, with capitalisation substantially higher than prior to the financial crisis. Within this context, it is important to highlight the essential role banks play in underpinning a country’s business and social fabric. They must remain profitable and solvent on account of their systemic importance and relevance at critical times, such as during the pandemic, while pushing ahead with the necessary cost-cutting and transformational digitalisation.

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