“Despite the difficulties in the economic and financial environment, Spanish banks have generated profits and maintain positive profitability.”
Spanish banks have increased their own funds, particularly those of higher quality, and have done so without any public aid, through the capitalization of generated profits and new capital issues.”
“The Basel III agreement establishes very demanding capital requirements, more so than it appears, although Spanish banks are in a position to meet them.”
“The government’s measures to correct the public deficit and boost employment must be accompanied by broad structural reforms that allow the Spanish economy to gain competitiveness.”
The Secretary General of the AEB, Pedro Pablo Villasante, highlighted today that Spanish banks as a whole have managed to generate profits and maintain positive profitability throughout the first nine months of 2010, a year he did not hesitate to describe as “the most complicated we have experienced since the international financial crisis erupted.”
Villasante commented that 2010 was marked by market pressure on sovereign debt in the Eurozone, with the crisis and bailout, first of Greece and then of Ireland, which introduced significant tension in wholesale financial markets, similar to that experienced in September 2008 with the collapse of Lehman Brothers.
“Undoubtedly, the crisis in Greece and Ireland has exposed the weakness of Eurozone Europe, as it is, in reality, a monetary union that lacks a common economic policy,” he stated.
In this complicated environment, Spanish banks have managed to remain profitable, albeit at lower levels than in the same period of 2009, and they have done so, as Villasante emphasized, through their own means and without the need for bailouts or injections of public capital, unlike what happened with other international competitors.
In his opinion, the results and profitability achieved by Spanish banks reflect the reduced economic activity caused by the contraction of household consumption and corporate investment. For banking entities, this has translated into a generalized fall in credit demand and increases in non-performing loans, with the consequent need to make larger provisions.
The Secretary General of the AEB believes that the situation of the Spanish economy is still fragile and lacks the necessary vigor for a rapid exit from the recession. However, he clarified that our economy is benefiting from widespread recovery expectations, which has allowed it to leave behind seven quarters of negative growth.
In his opinion, the measures adopted by the Government to correct the public deficit and boost growth and employment must be accompanied by broad structural reforms that allow the Spanish economy to gain competitiveness and expand its growth potential.
Throughout the months of 2010, Spanish banks have maintained the prudent strategy they began to implement when financial turbulence erupted in August 2007. This strategy, he noted, is based on four pillars: strengthening own funds and strong write-downs, spending discipline, active management of funding sources, and strengthening international franchises.
Regarding capital solvency, he indicated that Spanish banks are increasing their own funds, particularly those of higher quality, and are doing so through their own means, without any public aid, by capitalizing a large part of the generated profits and appealing to financial markets with new capital issues. Thanks to this, the risk-weighted solvency ratio of Spanish banks compares very favorably with that of their European competitors.
This sound capital position is due to the Spanish banking sector’s ability to generate high-quality capital on a recurring and organic basis, even in economic situations as complicated as the current one. “This capacity allows them, in addition to strengthening their capital position, to maintain their activities and businesses, and enhance their international competitive capacity,” he asserted.
Regarding the new capital agreement, known as Basel III, the AEB Secretary General commented that “it is a very demanding reform, more so than it appears, although Spanish banks are in a position to comply with it, as they possess high-quality own funds.”
In terms of solvency, he highlighted that banks have continued to make a significant effort in provisions by allocating high provision funds. He drew attention to the fact that the write-downs made in the first nine months of 2010 exceed the reported net profit by approximately 4 billion euros.
Pedro Pablo Villasante referred to the optimization of operational cost structures as another pillar of the Spanish banks’ strategy. “Operating efficiently is a traditional objective and characteristic of Spanish banking, which, as is well known, works with the best efficiency ratios in international commercial banking.”
However, Spanish banks have also had to mitigate the malfunction observed in wholesale markets since the international financial crisis erupted. The AEB Secretary General indicated that there is still “much distrust and risk aversion, and episodes of maximum tension frequently recur, occasionally paralyzing markets.” Faced with this scenario, Spanish banks have developed prudent and active management of funding sources, focused on extending maturities and increasing retail funding. The latter has allowed entities to attract and retain more clients and improve the asset funding structure with more stable deposits.
Furthermore, Spanish banks are taking advantage of all available opportunities to obtain financing from markets when they stabilize, thereby reducing their reliance on European Central Bank funding.
The AEB Secretary General emphasized the Spanish banking sector’s ability to generate ordinary and recurring results through effective geographical and business diversification. The intensive commercial activity carried out has helped sustain business volumes, margin management, and the balance sheet structure. “The business model developed by Spanish banks has proven resilient to the worst economic and financial crisis in the history of the world economy, which we are still enduring.”
Moreover, he noted that the net interest margin continues to drive the results of Spanish banking, despite the credit slowdown which, in his opinion, will follow a pattern more similar to that observed for the Eurozone as a whole in the future. However, he clarified that the second wave of the European sovereign debt crisis is delaying credit normalization.
Finally, he commended the dynamism shown by Spanish banking in its international businesses and franchises, demonstrating its capacity and flexibility to adapt to new economic environments and the banking dynamics of each market.
