European authorities are calling on banks not to falter in their efforts to become more profitable. They consider an additional push to improve efficiency essential, whether through further cost adjustments, continued reduction of non-performing loans and non-performing assets, greater sector consolidation, or by generating higher value-added services with appropriate pricing. Improving efficiency is a tool to bolster profitability, which is essential for providing the best service to an increasingly demanding customer.
The goal of continuing to improve profitability cannot rely on the future normalization of monetary policy, which is in the hands of the European Central Bank. However, it can benefit from the rational expectation of this occurring. Financial intermediation carried out by banks by channeling savings into investment is based on maturity transformation. For this reason, a steepening of the yield curve (higher interest rates in the medium and long term) favors an increase in the net interest margin. This would complement growth already being recorded thanks to the high dynamism in new financing. The yield curve reflects both maturity risk and economic outlooks. The end of debt purchases in the market by the ECB will eliminate distortions in risk management and in the expectations held by financial investors for the future.
The medium-term sustainability of the sector will be reinforced when its profitability consistently exceeds the cost of capital. This is gradually being achieved. Although it is not easy, as we are coming out of one of the greatest financial crises in our recent history and banks are operating in a difficult scenario marked by negative real interest rates and strict, complex regulation.
Digital transformation can also help achieve a stable improvement in profitability. For banks, it is a challenge, but also a demand from society. And without a doubt, Spanish banks are leaders in financial innovation on a European scale.
