We have just said goodbye to 2021, a year that will not be remembered as a great one. The difficult public health situation, caused by a pandemic that we have not yet fully left behind, has had a sharp and more prolonged contractionary effect than initially expected on global economic activity. As if that were not enough, in the final months of the year there was an increase—until recently unimaginable—in energy prices, and a resurgence of inflation, thought to be temporary and transitory but which, as if trying to imitate the virus, is proving unexpectedly persistent.
Banking activity, like the rest of the economy, is being affected by this situation. Unlike what happened in the previous crisis, the actions taken by the European banking sector, on its own initiative and in collaboration with the authorities, have helped to mitigate the adverse effects on economic activity caused by the pandemic. The launch and rollout of programmes have enabled credit flows to be maintained to finance investment and consumption. Measures such as advance payments, moratoria, grace periods and extensions of maturities, among others, have been aimed at easing the financial burden on businesses and households.
The European Banking Authority (EBA) has just published its risk dashboard (risk dashboard) for European banking for the third quarter of 2021. In this complex scenario, and with due caution given the uncertainty as to how the evolution of the pandemic will affect asset quality and profitability, the dashboard’s conclusions are generally positive: European banks maintain capital levels well above regulatory requirements, have returned to pre-pandemic profitability levels, and have improved the quality of their assets.
The banking sector in our country has been no exception and, if under these circumstances it has managed to face the crisis with determination, help to mitigate its effects on the economies of the countries in which it operates, and maintain adequate levels of solvency and profitability, it has been mainly thanks to the resilience of Spanish banks’ business model.
In recent years, Spanish institutions have developed an operating framework based on retail commercial banking. They have focused on intermediating household savings and on granting loans to families and businesses, without neglecting other typically banking activities such as financing public debt. This is a model which, together with proper diversification both geographically and by sector, has resulted in highly recurring earnings and a strong capital position.
According to information provided by the EBA, Spanish banking holds a prominent position among the Union’s banking systems in areas as relevant as efficiency, which measures the relationship between income from ordinary activity and operating expenses, and profitability, measured both against total balance-sheet assets (ROA) and against equity (ROE).
Regulatory capital ratios, although in the range below the average, are higher than those required by the prudential supervisor and fully consistent with the business model described, which inevitably results in higher asset density (and a larger ratio denominator) than other models more focused on investing in securities and purely speculative trading activity. The fact that the equity-to-assets ratio is similar to the Union average confirms this assessment.
Meanwhile, non-performing loans are contained, with an NPL ratio of around 3% on a consolidated basis, and with coverage percentages in line with those of other European banking systems.
As for early indicators (forbearance, stage 2), there is no sign, for the time being, that they are sending alarm signals. In Spain, this pattern is mirrored, with the delinquency ratio published by the Bank of Spain at historic lows and with a high level of coverage of balances recorded as doubtful, following the significant provisioning effort made in 2020. The measures adopted appear to be bearing fruit, easing the debt burden on the families that need it and enabling companies to align their recovery with meeting their financial obligations, in line with their capacity in the current situation.
The challenges facing the banking sector are considerable in scale: digitalisation, sustainable finance, competition from new unregulated players, risks linked to cybersecurity, and achieving profitability that consistently covers the cost of capital are among the most evident.
In the coming weeks, Spanish banks will publish their results for the full year 2021. The EBA data provide some room for optimism, and everything suggests that the path of prudence and anticipation chosen in 2020 was the right one, by increasing write-downs and provisions and sacrificing headline results in favour of strength. The benefits are now becoming apparent.
Santiago Pernías, adviser to the Spanish Banking Association (AEB)
