The AEB Secretary General, Pedro Pablo Villasante, noted today that the Spanish economy has begun to grow this year in a much more favorable economic and financial environment and, although growth remains slow and weak, it can be said that during this year the economic recovery has consolidated and the crisis of our financial system has been left behind.
During the presentation of results for Spanish banks corresponding to the first nine months of the year, Pedro Pablo Villasante emphasized that the growth of the economy in 2014 and the forecast for 2015, which is even higher, dispel doubts that this improvement could be due to a mere statistical rebound effect.
Despite this improvement, the AEB Secretary General noted that significant adjustments remain to be resolved, particularly those relating to high levels of unemployment and debt, both public and private, making it necessary to “finalize the necessary reforms to achieve a greater level of efficiency, flexibility, and competitiveness that will enable economic growth and facilitate the much-needed creation of employment.”
He also referred to the negative effects that the slowdown in the main European economies is having on the Spanish economy, as well as the effects of financial fragmentation in the eurozone, which maintains heterogeneous financing conditions for companies depending on their country of origin, and is hindering the transmission of ECB monetary policy to the real economy.
Precisely—he noted—the expansionary measures approved by the ECB throughout 2014 are aimed at combating financial fragmentation and, above all, at boosting economic growth and addressing low inflation expectations. In his opinion, the effectiveness of these measures is still barely noticeable, beyond the positive depreciation of the euro, although he recalled that the ECB has announced additional unconventional measures if those adopted are not sufficient to achieve its objectives.
Regarding the Comprehensive Assessment conducted by the EBA and the ECB before the latter assumed its responsibility as the single banking supervisor for the eurozone, he noted that the Spanish financial system, and particularly the banks belonging to the AEB, have obtained excellent results, both in terms of the margin achieved in the stress tests under very severe adverse scenarios and in the asset quality review. In the latter, which is the objective part of the test not subject to assumptions, Spanish banks stood out for requiring smaller adjustments to their balance sheets—less than 0.2% of risk-weighted assets—than the other participating countries.
In the opinion of the AEB Secretary General, the scrutiny conducted by the ECB and the EBA confirms the high quality, transparency, and rigor of the public information of our institutions and has dispelled any doubts that may have existed regarding the capacity of Spanish banks to contribute to the recovery of the Spanish economy and to finance creditworthy loan demand.
Furthermore, he explained that the tests have demonstrated the effort made in the restructuring and simultaneous capitalization of Spanish banks which, in the case of institutions associated with the AEB, has been achieved without having received public capital assistance, unlike many other institutions included in the review. They also confirm their high level of solvency, which is reinforced by the development of a lower relative risk business model, based on retail commercial activity, and on international expansion carried out through subsidiaries that operate with financial autonomy from the group to which they belong, sharing the same culture of prudence in risk management.
Pedro Pablo Villasante highlighted the significant progress made in the construction of the Banking Union, both through the establishment of the ECB as single supervisor and through the implementation of the Single Resolution Mechanism. “We are embarking—he said—on a future where what will matter is the financial condition of each bank and not the country where its registered office is located, which is essential for our institutions, since Spain has been considered a peripheral country during the crisis.” However, he warned that the financial stability of the eurozone will not be completed until the fiscal integration of its member countries is achieved.
Pedro Pablo Villasante also reported on the results obtained by Spanish banking groups from January to September 2014. During this period, profit attributable at constant perimeter amounted to €7,449 million, 11.1% higher than that obtained at the same date in the previous year. If we take into account the effect of the recent perimeter increase with the incorporation of Grupo Banesco (Abanca), the attributable profit would be €9,723 million. For its part, the profit after tax of the aggregate profit and loss accounts of Spanish banks as of September 2014 is €4,069 million, 31.2% more than that obtained in September 2013.
Regarding these results, he commented that they occur in an environment not conducive to banking activity, due to weak economic growth and the widespread fall in interest rates, which translates into low income generation and still high levels of non-performing loans, with the consequent effort in provisions and write-offs.
Indeed, Spanish banks allocated €17,412 million for write-offs and provisions through September, representing 60% of the operating margin and double the published consolidated profit. The AEB Secretary General described as “colossal” the write-offs made by Spanish banks from 2007 to September 2014, totaling €190,538 million, more than double the €86,878 million of published attributable consolidated profit in this period.
“These references allow us to understand the growth potential of Spanish banks’ profits, which will become apparent as soon as economic growth consolidates and provisioning requirements decrease,” predicted Pedro Pablo Villasante, who expressed confidence that banking results, with the current stabilization of financial markets and the beginning of recovery, have already passed the turning point.
From the profit and loss account, he highlighted the result of operating activity, due to the positive evolution of the interest margin, the most recurring part of income as a result of the traditional activity of commercial banking, and the containment of operating expenses. On this aspect, he indicated that an important part of the strategy of Spanish banks to gain competitiveness focuses on improving efficiency, as this allows them to offer better services at lower prices to their customers. From January to September, the efficiency ratio registered significant progress, remaining at excellent levels below 50%.
In terms of solvency, he noted that the new Common Equity Tier 1 (CET 1) ratio stands at 11.54%, slightly higher than the former Core Capital of a year ago, although in reality it represents a strong reinforcement of solvency as CET1 is a reinforced capital concept, much more demanding. In this context, he emphasized the effort made by Spanish banks over these years to strengthen their equity, which has grown by €71,413 million.
The financial structure of Spanish banks has also continued to improve, he explained. The deposit coverage ratio over loans has continued to increase to 90.6%, which reveals the effort made by our institutions to balance the financial structure of their balance sheets and make it less dependent on wholesale funding markets.
