The Diplomat in Spain

Ana Linares. Madrid.

Everything seems to indicate that the recovery of the banking sector in Spain could have started, although nothing suggests the path banks are about to cover is going to be short.

If 2011 was the year of Bankia’s bailout and 2012 the year when banks had to make a greater effort regarding allowances and reserves, 2013 was the moment when banks took the first step towards recovery.

Last financial year, banks obtained a bit more than 7,270 million euros, as opposed to the benefit of more than 16,000 million they had obtained in 2008. During this time, the four great decrees set in motion by different governments in Spain since 2008 have forced Spanish banks to cover around 15% of their loan portfolio, being more than 170,000 million euros in all, according to the Spanish Banking Association (AEB in its Spanish acronym).

They have made this under the worst circumstances. In a highly vegetating economy, which does not grow, which has difficulties to access financing and whose business, at least in Spain, is complicated.

That means that it is difficult for our banks to buy money and that when they do it, they have few solvent clients to lend it to. Besides, the last regulations have made it more expensive for banks to lend money to their clients. As a consequence, credit investment barely grows and when it does, since interest rates in Europe are very low, they can charge very little money for the loans.

Not to mention that during the last years, most of the money raised in the markets has been used for the purchase of Spanish government bonds. At the present moment, Spanish banks have sovereign titles of the Kingdom of Spain in their portfolios to the value of around 300,000 million euros.

In this confusion, the ones not fearing for their future are those considered to be healthy banks, being among them two of the big ones: BBVA and Santander. Besides, they have benefited from a high exposure abroad. The Santander could be an example: a bank generating only 14% of its profits in Spain, which is less than in Brazil or the United Kingdom, where 40% of its profits are generated.

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If the economy grows and unemployment falls, banks will be able to lend money and reduce slowness in paying

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All experts point out that the improvement of the macroeconomic scene in Spain will tend to benefit the banks. If the economy grows and unemployment falls, banks will be able to find more opportunities to lend money, which will improve all their ratios and, will probably help reduce the index of non-performing loans.

In the future, in a normal financial scene, they could start releasing some of the reserves made, which will result in benefits. The question now is to know at what speed will both the economy and Spanish banks leave the tunnel behind.

Where do the main Spanish banks set off from? Until the crisis started, the Spanish banking industry was one of the most profitable and efficient systems. The last events have caught up with them and these are the main ratios of the biggest banks in the country.

The crisis weight these years has ended with a reduction in the profitability indicators (ROE), which were in some cases around 20, or the efficiency, which was around 30% in some banks.

At the moment, Bankinter is one of the big Spanish banks that seem to be in a better shape within the domestic spectrum. Among the big ones, some experts believe that the one that could develop best, if the Spanish economy’s recovery is confirmed, would be BBVA, since the weight of its business in Spain is bigger than Santander’s.