Although the challenges facing the banking sector in Europe are formidable, it is evident that the banking sector, at least in Spain, has left behind the arduous path of recent years. This is indicated by the results of the main Spanish banks during the first quarter of this year, which show an expansion of intermediation margins thanks to more positive credit dynamics, stable operating costs, and provisions that tend to normalize, due to a progressive reduction in the non-performing loan ratio and an economic environment that is growing steadily at rates close to 3%.
The foundations supporting this outlook rest on three fundamental arguments. First, the ability of the Spanish banking sector to adapt to environmental circumstances, while demonstrating the robustness of its business model, leveraged on adequate geographical and sectoral diversification. Second, the sector restructuring designed by the Government in 2012 has enabled most Spanish institutions to operate in a more stable environment without major disruptions. Finally, the strict regulatory framework has given rise to institutions that, as a whole, have a high degree of liquidity and solvency. Thus, it could be concluded that banking institutions in Spain are prepared to capitalize on the benefits of a more favorable and dynamic economic cycle, such as the one Spain has been enjoying in recent years, while being in a position to face any adversity under better conditions than in the past.
Investors have rewarded this effort with more optimistic expectations about the sector’s potential in the market; that is, the price-to-book ratio has risen to 0.84, nearly 60% higher than that recorded at the end of 2012. Nevertheless, the sector, on average, is being valued below unity, which means that the market expects the cost of capital not to be covered for some time and also estimates that the sector still has to address some very important challenges. Among these, the excess capacity of the system, the impact of digital transformation, and, above all, the absence of a sustained level of profitability with which to pay the cost of capital and, additionally, reward the shareholder who trusts in a sector, such as banking, so relevant to a country’s economic growth through the financing of businesses and households, stand out.
Juan Carlos Delrieu. Director of Strategic Planning at AEB.
