The strength and health of the balance sheet and the high quality of the results provide a solid foundation that allows us to look to the future with confidence.
The business model of Spanish banking is a differentiated, solid, and profitable model of client-focused retail commercial banking, managed prudently and well-provisioned.
This business model provides Spanish banks with greater recurrence of income, a lower risk profile in their operations, and high efficiency in the provision of financial services, which makes their results more stable.
In the first nine months of the year, the consolidated groups obtained an attributable profit of 14,141 million Euros, representing a growth of 20.1% compared to the same period of the previous year.
Meanwhile, the aggregate profit of individual banks stands at 9,841 million Euros, with an increase of 42%, which represents a return, measured in terms of average balance (ROA), of 1.1%, an improvement of 22 basis points compared to September 2006. On a consolidated basis, the ROA stands at 1.18%, 7 basis points higher than a year ago. ROE (return on equity) also shows good year-on-year growth.
The positive evolution of the income statements of Spanish banks, both in the individual and consolidated aggregates, in the first nine months of 2007, can be seen in the improvement experienced across all margins. The growth in results has been very balanced in terms of the contribution of its different components, supported by the most recurring part of income and bolstered by very contained expenses.
In the aggregate of individual accounts, improvements (equally, about €1,300 million each) in the financial margin, dividends received, and the remaining components of the ordinary margin (results from financial operations and net commissions, primarily) represent the basic core of the year-on-year increase, in a period where extraordinary results have been barely registered and where the moderation in the growth of operating expenses has continued.
The recovery of the financial margin, which in 2006 had reduced its contribution to the year’s results as a percentage of average total assets (ATA), has translated in these first nine months of 2007 into a five-basis-point improvement compared to December 2006, reaching 1.07% of ATA. This improvement was achieved in a context of strong competition and reduced differentials characteristic of our financial system, in contrast to that of other European Union countries.
Net commission income grows at the same rate as average total assets, around 14% annually, following the trend observed throughout the year: improvement in income from the commercialization of non-banking services and containment of commissions charged to clients for payment method services, as a consequence of entities’ policy of reducing the price of banking services for their retail clientele.
The good results obtained from financial operations, especially with available-for-sale securities, together with the significance of dividends received from subsidiaries, allow for a substantial improvement in the ordinary margin, which stands above 2.5% of ATA and, in absolute values excluding the group’s own dividends, already represents approximately twice the structural costs.
During this year, the slight increase in the number of employees and offices has continued; despite this, the moderate increase in operating expenses, barely 10% higher than the previous year, has allowed for continued gains in efficiency, with indicators clearly below 40%, and in productivity, both per employee and per office, which consolidates us as one of the most competitive and efficient banking systems in our environment.
After fiscal year 2006, the first entirely under international standards, in which the transition process to the new accounting regulations was completed, the needs for write-offs and provisions have been lower in the first nine months of 2007, although they have also been accompanied by lower results from sales of permanent investments (Other gains and losses) and a reduced tax burden as a consequence of the reform in the tax rate.
In terms of the aggregate of the income statements of consolidated groups, the same pattern is repeated: favorable evolution of more recurring results (intermediation margin and net commission income) that compensate for higher operating expenses and the effort in write-offs and provisions supported by international businesses, with an increase in all margins as a percentage of average total assets.
Throughout the year, banks have continued to grow their credit investment in Spain at a good pace of 19.7% and have continued the process, initiated in previous years, of diversifying credit investment, decreasing the growth rate of credit linked to real estate activity, consistently with the expected orderly and gradual adjustment of the construction sector, reorienting growth towards credit activity with companies and consumer financing.
The non-performing loan ratio, although showing an upward trend, remains at historical lows and is strongly provisioned.
The current non-performing loan and coverage ratios indicate that diversified credit growth has been healthy and prudently provisioned, placing Spanish banks in a very favorable comparative position with respect to other countries.
Furthermore, the policy pursued by Spanish banks in recent years of financial balance and diversification of funding sources has allowed for a significant reduction in recourse to interbank markets, maintaining a percentage of credit financed by customer deposits above 80%, one of the highest among countries in our environment, and increasing the capture of resources via securitizations and issues of highly-rated securities.
Regarding geographical diversification, a strategic priority for some Spanish banks, it can be said that subsidiaries represent 30% of the average total assets of the aggregate consolidated balance sheet and contribute 34% to the consolidated result.
Despite the strong growth in activity, Spanish banking maintains the strength of its balance sheet both due to the high level of equity available and the low non-performing loan ratio of its investments and their high degree of coverage.
The solvency level remains high, with a BIS ratio of 11.8%, which represents a surplus of eligible own funds of 47% over the minimum required.
In summary, high solvency and good results, the quality of investments—prudently managed and well-provisioned—financial balance, and the diversification of markets and funding sources are strengthening the balance sheet and allowing Spanish banks to face the future with confidence in an increasingly uncertain global economic environment.
