The Spanish Banking Association (AEB) estimates, in its July Economic and Financial Report, that the Spanish economy meets the necessary conditions to enter the expansive phase of the cycle, so that real GDP growth could reach 1.5% this year and exceed 2% in 2015. Net job creation and the reduction in the active population are expected to cut the unemployment rate to around 23% next year.

Likewise, it considers that the expansion of structural reforms aimed at achieving a more exhaustive (employment) and efficient (productivity) use of production factors would strengthen growth capacity and job creation, while accelerating the adjustment of pending imbalances: unemployment, public accounts, and private sector deleveraging.

Monetary policy and advances in the Eurozone’s financial architecture are other decisive elements in the medium-term evolution of the Spanish economy. The AEB warns that liquidity injections could become stagnant in financial markets, with the risk of generating asset overvaluation, and reminds that credit expansion requires solvent demand and the implementation of profitable investment projects. Economic growth precedes credit expansion.

According to the AEB, the Spanish banking system, which has made significant progress in its restructuring and deleveraging, is in good condition to face the Asset Quality Review (AQR) and the stress tests prior to the start of ECB supervision from next November.

The Banking Union ensures greater transparency and more homogeneous competitive conditions among entities across the Eurozone. Nevertheless, the sector continues to face significant challenges such as the moderate growth in credit demand, high non-performing loans, capital requirements, and the compression of margins accompanying the extraordinarily low interest rates.

La entrada The Spanish economy will grow in 2014 at a rate close to 1.5% and could exceed 2% in 2015. se publicó primero en Asociación Española de Banca.

The income statement of Spanish banks during the past year was determined by the lower provisions that needed to be allocated compared to the exceptional restructuring carried out in the previous year. These lower provisioning and allowance requirements made it possible to offset the decrease in the interest margin, which in turn reflected the 1.2% decline in GDP in Spain during that year and a financial environment characterized by low interest rates.

The aggregate consolidated balance sheet of Spanish banking groups contracted by 10.2% during the past year to stand at 2.2 trillion euros. This sharp decrease reflects the significant deleveraging carried out throughout the year, which allowed a reduction of 62,448 million in net balances taken from central banks and other credit institutions (-57.3%) and a decrease of 77,285 million in the volume of securities issued (-19.3%).

Spanish banks have been able to undertake this sharp reduction in wholesale funding thanks, in part, to the increase of 14,719 million (1.3% in relative terms) in bank deposits obtained from customers and, primarily, to the decreases in credit, by 101,106 million euros (-7.1%), and in investment in fixed-income securities by another 28,358 million (-8.5%).

The decline in credit and the increase in non-performing assets placed the non-performing loan ratio at 8.6%, two percentage points higher than a year ago, while coverage reached 55%, 14 percentage points lower. Meanwhile, the ratio of deposits to loans improved significantly to stand at 89%, seven percentage points above the coverage ratio at the end of 2012.

The deleveraging was completed with an increase in the aggregate equity of Spanish banking groups by 6,384 million euros to stand at 166,123 million, representing a 4% increase compared to December 2012. This maintained the growth path of solvency ratios in recent years, placing core capital at 11.7%, approximately 120 basis points higher than a year earlier.

The consolidated income statement of Spanish banking groups was marked in the past year by the weak economic activity mentioned above and by the low interest rate environment. The basic margin decreased by 6,292 million, 8.8% lower than that obtained a year earlier, primarily as a consequence of the 11.6% decline in the interest margin. This decrease was due to the reduction in asset profitability and the contraction of commission income (-3%).

The favorable performance of results from financial operations, which increased by 20%, and from exchange differences made it possible to partially offset the decrease in the basic margin and the losses recorded in other operating results, arising from real estate activities developed by group subsidiaries, such that the gross margin was reduced by 4,999 million (-6.4%).

Although operating expenses remained practically at the same levels as in the previous year, the decrease in the gross margin caused the efficiency ratio to increase from 48% in 2012 to 51% at the end of 2013.

All of this placed the net operating margin before provisions at 35,713 million, 12.2% lower than that recorded a year earlier. In terms of return on average total assets (ATA), it meant moving from 1.68% to 1.52%, 16 basis points lower.

23,323 million euros were allocated to provisions and allowances during the 2013 financial year, a figure representing 65% of the aforementioned margin and 0.99% of ATA. Despite the significance of this restructuring effort, the amount allocated for this purpose was 40.6% lower than that dedicated to covering the exceptional restructuring carried out during the 2012 financial year and, as a result, the operating activity result improved by 10,960 million, to stand at 12,391 million. In terms of return on ATA, it meant moving from 0.06% to 0.53%.

The lower restructuring requirements for other assets and the better performance of sales or divestments were entirely absorbed by the significant increase of 3,119 million experienced in corporate income tax expense and by the increase in minority interests, by another 958 million.

Thus, the attributable result of Spanish banking groups in the 2013 financial year stood at 7,274 million euros, 10,099 million more compared to the negative result recorded in 2012.

The individual financial statements of Spanish banks show the same trends analyzed in the consolidated statements.

The individual balance sheet of Spanish banks decreased by 13.3% to stand at 1.4 trillion euros at the end of 2013. This sharp contraction was implemented through the repayment of almost half (-43.1%, 60,902 million net) of the funds taken by Spanish banks from central banks and other credit institutions and the reduction of the balance of securities issued by 50,130 million (-24.2%). Conversely, deposits obtained from customers increased by 6,506 million, as did net equity by 4,707 million, representing 3.9% more than a year earlier.

As a consequence of the deleveraging process of Spanish banks, customer credit decreased by 77,516 million euros (-9.5%) while investment in fixed-income securities decreased by 28,331 million, 12.7% lower.

These variations in the financing and investment structure of Spanish banks caused the coverage ratio of deposits to loans to improve by 10 percentage points to stand at 95%. The decline in credit and the increase in non-performing assets raised the non-performing loan ratio to 14.36%, with coverage of 57%.

Regarding the individual income statement, the basic margin decreased by 26.8% to reach 24,938 million, as a consequence of the contraction experienced in the interest margin, in net commissions, and in dividend income.

However, the favorable performance of results from financial operations and exchange differences, the containment of operating expenses, and the lower restructuring requirements, compared to the exceptional 2012 financial year, raised the operating activity result to 3,388 million, that is, 11,688 million more than those obtained a year earlier. In terms of return on ATA, it meant moving from -0.52% at the end of 2012 to 0.22% obtained a year later.

After accounting for corporate income tax and certain extraordinary results, the result for the 2013 financial year of Spanish banks amounted to 3,647 million euros, 9,151 million more compared to the losses recorded in the previous year.

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La entrada Spanish banks obtained an attributable profit of 7,274 million euros in 2013 se publicó primero en Asociación Española de Banca.

Regarding the correction of imbalances, the Report highlights the adjustment made by the external sector based on competitiveness gains and the internationalization of Spanish companies, a process that has been favored by the notable reduction in relative unit labor costs. It also considers that progress has been made in the restructuring, recapitalization, and consolidation of the financial system, private sector deleveraging, and the adjustment of the real estate market. In a particularly adverse context, progress has been made in consolidating public accounts, as evidenced by the reduction in spending and the primary structural deficit.

Regarding the financial sector, AEB notes in its Report that balance sheets have been cleaned up, so that all credit institutions comfortably meet the requirement of a 9% core capital ratio along with a high level of provisioning. It also highlights the launch of Sareb as manager of impaired assets from institutions that have required public assistance, which has significantly reduced financial institutions’ exposure to the real estate sector.

At the European Union level, the Report emphasizes important initiatives adopted, such as the ECB’s incorporation of Outright Monetary Transactions (OMT) last September, and the Eurogroup’s design of the Banking Union which, starting from a single supervisory mechanism under the ECB’s responsibility, must be complemented by a common deposit guarantee and resolution system.

In AEB’s view, these three complementary and interdependent pillars are essential to correct market fragmentation, restore credit flow, and reestablish monetary policy transmission mechanisms. It also refers to the extension of deadlines for meeting budgetary targets facilitated by EU authorities, who are simultaneously paying greater attention to activity-boosting policies with the recent allocation of funds to combat youth unemployment and support SMEs.

The Economic and Financial Report emphasizes that, since the beginning of the year, activity, spending, and employment indicators point to improvement. If this trend consolidates, it indicates that a smaller GDP decline can be expected in the second quarter—around 0.2 percentage points—leading to stabilization in the second half of the year and the beginning of a recovery throughout next year, with average growth close to 1%. It adds that this recovery will necessarily be moderate due to the containment of domestic demand linked to the adjustment and deleveraging process, although it could benefit from an improvement in the international environment and competitiveness gains. According to the Report, it can also be expected that the fruits of the structural reforms undertaken will begin to be reaped, especially in employment matters, if the growth threshold from which new jobs are generated can be reduced.

In any case, AEB specifies in its Report that vigilance must not be relaxed, as the path ahead to position basic balances in a comfortable position and recover pre-crisis production and employment levels remains considerable. AEB’s Economic and Financial Report concludes that this process can and must be accelerated by persevering in supply-side policies aimed at making markets more flexible and expanding growth potential as a source of job creation.

La entrada AEB estimates that the correction of basic imbalances and adjustment measures pave the way for the recovery of the Spanish economy se publicó primero en Asociación Española de Banca.