“The year 2011 has been very complicated for banking activity, despite which Spanish banks have achieved results and profitability in the first nine months of the year that, although lower than a year earlier, can be considered good”
“The contraction in household consumption and business investment, which has been reflected in a widespread decline in credit demand and an increase in non-performing loans, has forced institutions to continue making significant provisions”
“Spanish banks have once again increased their accounting equity in this period, as an essential part of the strategy implemented during the crisis, so they now have an excess of own resources of €48,804 million over the minimum regulatory requirements”
The Secretary General of the AEB, Pedro Pablo Villasante, highlighted yesterday that the year 2011 is proving particularly complicated for banking activity, due to economic weakness and the effects of the sovereign debt crisis, despite which Spanish banks have achieved results and profitability in the first nine months of the year that, although lower than a year earlier, can be considered good.
In Villasante’s opinion, banking activity during this period has been determined by the contraction in household consumption and business investment, which has been reflected in a widespread decline in credit demand and an increase in non-performing loans, forcing institutions to continue making significant provisions.
Spanish banks, he explained, are trying to limit the effect of the decline in credit demand and the pressure of financial costs by improving balance sheet management and margins through intense commercial activity that allows them to maintain their ability to generate ordinary income.
He placed special emphasis on the ordinary nature of the results obtained in the first nine months of the year and on the maintenance of the net interest margin that allows Spanish banks to continue operating positively after making significant provisions.
The Secretary General of the AEB stressed that Spanish banks have once again increased their accounting equity in this period, as an essential part of the strategy implemented during the crisis, so they now have an excess of own resources of €48,804 million over the minimum regulatory requirements.
This policy of strengthening solvency has allowed Spanish institutions, he indicated, to meet the demand for higher levels and higher quality of capital being required by international authorities and to pass the stress tests conducted in 2011 by the European Banking Authority.
In his opinion, these tests have been called into question for not including among their hypotheses the possibility of default on public debt issued by European states, a circumstance that has only benefited European banking systems whose banks, unlike Spanish banks, have significant exposures to debt from countries that have been bailed out or on whose debt a voluntary haircut is being projected.
Regarding the capital requirements agreed by the European Council on October 26, Villasante recalled that the Spanish banks affected by this requirement have stated that they have the capacity to meet it on their own, within the established timeframe, without needing to request public aid or alter their future plans.
Despite not having received public aid, he highlighted that, according to the Bank of Spain’s Financial Stability Report from last November, the two largest Spanish banks are among the most capitalized in European banking, and this is particularly true if the comparison is made without taking into account RWAs (Risk-Weighted Assets), whose calculation shows significant differences between countries.
To strengthen bank balance sheets, it is essential, in his opinion, that the declared own resources be effective and, to this end, Spanish banks have once again made a significant effort to clean up their assets by allocating high provision funds (€16,140 million), which in the period in question represent 50% of the operating margin and far exceed the amount of consolidated net profit.
The improvement of the financial structure, through the intensification of customer deposit collection and the issuance of securities when the market allows, was also analyzed by the Secretary General of the AEB, who also referred to the continuous effort of Spanish banks to be more efficient. In this regard, he explained that the efficiency ratio has remained below 50% during the crisis, although it has recorded growth in the last twelve months due to the stagnation of the gross margin and the increase in costs produced by international expansion and, specifically, in subsidiaries operating in countries with higher inflation and whose currencies have appreciated against the euro.
On this point, he recalled that the main Spanish banks continue to energize and consolidate their international franchises, as they have been able to take advantage of the opportunities that the crisis has offered them to continue their expansion into new countries and to consolidate their significant positions in the financial systems where they already operated.
Regarding the Spanish economy, Pedro Pablo Villasante commented that it is showing signs of stagnation and possibilities of entering a recession, a forecast that the European Central Bank has already anticipated for the eurozone in 2012. To get out of this delicate situation, in his opinion, we must persevere in correcting the public deficit according to the committed objectives and accompany it with effective structural reforms that allow us to gain competitiveness and reduce the risk premium of the Kingdom of Spain, which acts as a floor for the financing cost of Spanish companies.
In his opinion, the sovereign debt crisis has called into question the fundamental pillars for managing the liquidity risk of banking activity and, although he welcomed the recent measures adopted by the ECB to ease tensions in financial markets, he considered it essential to resolve the institutional weakness of the eurozone that the crisis has revealed. “It is necessary to break both the destructive economic spiral in which we currently find ourselves and the chain of financial contagion between countries that is affecting us,” concluded the Secretary General of the AEB.
