During the presentation of Spanish banks’ results for the first quarter of 2014, Pedro Pablo Villasante placed special emphasis on the need to undertake “an additional collective effort to complete the reforms that our economy requires” and, in particular, to persevere in reducing unemployment and high public and private debt, especially if the low inflation phase continues.
In this context, he welcomed the ECB’s new monetary stimulus measures which, he said, are aimed at addressing low inflation expectations, combating financial fragmentation in the eurozone, and boosting economic growth through improved access to business financing.
The AEB Secretary General reiterated that Spanish banks remain committed to this necessary collective effort, contributing their work, financial capacity, and determined collaboration so that the various initiatives being approved by the authorities can be successful and serve to support the economic recovery. In this regard, he indicated that the latest figures show an encouraging change in the evolution of credit to businesses and households.
Spanish banks, he explained, have already demonstrated their responsibility and commitment to Spanish society. First, by avoiding intervention and recapitalization with public aid. Second, by contributing their financial capabilities to restructure institutions undergoing reorganization and thus reduce the cost to the public treasury. And third, by covering the portion of banking intermediation that was left unattended as a consequence of troubled institutions exiting the market.
He also referred to the comprehensive assessment tests, with asset quality review (AQR) and stress test, that the ECB is conducting before becoming the prudential banking supervisor of the eurozone, tests which, he indicated, AEB banks face with confidence as they consider they will serve to increase transparency and facilitate comparison between European institutions under a common methodology.
The AEB Secretary General analyzed in detail the results obtained by Spanish banks during the first quarter of 2014, which recorded an attributable profit of €2,243 million, 28.6% less than in the same period of the previous year. In this regard, he commented that the profits and returns for the first quarter of 2014, although positive, are still modest and occur in an environment of low growth and a generalized decline in interest rates.
This scenario, he indicated, is not conducive to the development of financial intermediation activity, which is why Spanish banks are focusing their competitive strategy on defending their business margins. However, in his opinion, as important as sustaining the recurrence of gross margin is maintaining control of operating expenses, which is why the strategy of Spanish banks to gain competitiveness focuses on a continuous effort to be efficient. “Being efficient has more merit in a retail commercial banking business model, where it is necessary to have an infrastructure that allows proximity to the customer,” he concluded.
Furthermore, Pedro Pablo Villasante specified that the amount allocated to provisions in the first quarter is equivalent to 64% of the operating margin and more than double the published consolidated profit. These references allow us to understand, he said, the profit growth potential of Spanish banks, as soon as economic growth consolidates and provisioning needs decrease.
In any case, he described as “colossal” the provisioning effort that Spanish banking groups have made throughout the crisis. From 2007 to March 2014, they have allocated €171,740 million to provisions and write-downs, more than double the €79,411 million in attributable profit obtained during that period. In terms of average total assets, the current level of provisioning is twice as high as what was done before the crisis.
Regarding how the current financial year will evolve, he believed that profits and returns will grow as the end of the year approaches, supported by financial stability and economic growth, which may be higher than current forecasts.
Likewise, the AEB Secretary General referred to the regulations governing new capital requirements, known as Basel III, in force since January 1, which represents a significant increase in the quantity and quality of capital requirements. The new capital ratio implemented, the Common Equity Tier 1, stands at 10.68% for Spanish banks, and represents a strengthening as it is a much more demanding superior capital concept than the former Core Capital.
Finally, regarding the financial structure of Spanish banks, he commented that it has improved significantly over the past year, as the percentage of deposit coverage over balance sheet loans continues to increase, making Spanish banks less dependent on wholesale funding markets.
