Good morning, allow me to begin by thanking the organizers for their kind invitation to participate in this Conference, although the chosen topic is certainly not simple.<\/p>\n
Before analyzing the prospects for banking profitability, I believe it is necessary to establish what we mean when we refer to the profitability of credit institutions. To do this, I will focus on briefly describing what banking business entails; what the sector’s profitability situation is; and what mechanisms determine it. Finally, I will attempt to outline the future elements\u2014the levers for action\u2014that need to be activated to restore business profitability. <\/p>\n
In short, we can define banking business as one focused on maturity transformation and the provision of various financial services to its clients. Let’s start with maturity transformation, as this role truly defines a bank. Maturity transformation consists of using customer deposits, many of which are short-term, sight, or transactional (related to payments and collections), to safely transform them into long-term loans that finance the consumption and investment projects of their clients, both individuals and non-financial companies (including SMEs). It is nothing short of a small miracle that banks are capable of using our deposits to finance 15-year mortgages: in fact, banks are the only financial institution that can undertake this important function in a solvent manner. Evidently, this maturity mismatch, along with the liquid nature of liabilities (deposits) and the illiquid nature of assets (loans), necessitates close regulation and supervision of banks, as well as the creation of institutions, such as deposit guarantee funds, that underpin the stability of the entire sector. <\/p>\n
This maturity transformation process, in turn, determines the fundamental role banks play in the transmission of monetary policy: in the traditional scheme, the monetary authority sets short-term rates, and it is banks, along with financial markets, that, through their asset and liability operations, extend their effects across the entire yield curve and for all maturities. In the Eurozone, unlike other monetary areas, the weight of bank financing in the real economy (to the detriment of markets) only increases this crucial role of the sector in transmitting monetary impulses. <\/p>\n
In addition to this maturity transformation process, banks provide their clients with various financial services in areas such as payments and collections, debit and credit cards, and the commercialization of non-banking financial products, such as investment funds, pension funds, or insurance products. To the extent that Spanish banks establish long-term commercial relationships with their clients, this provision of services is a fundamental pillar of the business, although in many cases, gratuity remains the norm when it comes to recovering the cost of services rendered. However, this function, that of providing services, is not specific to banks and could be performed by other financial institutions that are not necessarily banks. In other words, it is the attraction of liabilities in the form of deposits and maturity transformation that uniquely and incontrovertibly define what a bank is. <\/p>\n
Let’s move on to the issue of profitability. Firstly, what is relevant is not the absolute figure of profits, but its profitability in relation to capital, to the bank’s shares. In this sense, the so-called ROE, or Return on Equity, is the most widely used relative measure of profitability. Secondly, banks, like any other company, must offer their shareholders a return that compensates for the risks of owning those shares because, if they do not, the equity available to carry out their activity will tend to decrease over time, and with it, the volume of activity the bank can perform will also decrease. In more concise and technical terms, in a market economy, the ROE of any company must cover the cost of capital demanded by shareholders, and the banking sector is no exception. For the European banking sector, this cost of capital would be in the range of 10-12%. <\/p>\n
What is the situation of the Spanish banking sector from a profitability perspective? It can be summarized as a gradual improvement in profitability, towards the 6% range, with significant differences between entities, and with difficulties in approaching the cost of capital in the short term. In the medium term, a sector (banking or any other) that is unable to adequately remunerate its shareholders is destined to experience a setback and, if this trend continues in the long term, to disappear. This, which sounds very dramatic, is simply the result of an ROE that does not cover the cost of capital. That said, it should be noted that dividend yield, in a negative interest rate environment, is by no means negligible, which reduces the drama of what was said previously. <\/p>\n
In any case, it is surprising, even paradoxical, that the cost of capital for banks has not decreased, despite all the new regulations introduced after the crisis that make banks much safer. As an example, the levels of higher quality capital, the so-called CET1, have more than doubled, as have regulatory capital ratios, be it CET1, Tier 1<\/em> or Tier 2<\/em>. Probably, there are other uncertainties affecting the sector’s prospects that explain this paradox. I will mention some of them below. <\/p>\n There are four elements weighing on the sector’s profitability in the short term. Firstly, the wounds the crisis has left on bank balance sheets, what we would call legacy issues<\/em> in English. Secondly, the interest rate environment in which the sector operates, not just low rates, but negative rates. Thirdly, the impact of post-crisis regulation, which is very demanding and, above all, enormously complex and changing. And finally, the impact of the digital revolution, the world of fintech, on the sector. Let’s briefly review these elements. <\/p>\n The Spanish crisis, prolonged and severe even by international standards, was a crisis of over-indebtedness, of excessive leverage, concentrated around real estate activities, specifically construction and development of residential housing. Consequently, the scars are related to this pattern: very high levels of non-performing loans, although well-provisioned and clearly decreasing; also high levels of foreclosed assets, although valued at market prices; and moderate credit growth, as a result of the continuous deleveraging process of those companies and households that became over-indebted during the bubble years and did so through banks. In sum, a considerable level of unproductive assets (albeit with a very low financing cost at present) and moderate balance sheet growth, again indicating the enormous dispersion among entities. The most important thing, in any case, is that these wounds are already healing and that as we advance in the economic recovery process, their relevance and impact on the evolution of results will be smaller. <\/p>\n Interest rates are another element of tension. Allow me to distinguish between low interest rates, or rates close to zero, and negative rates. The former are normally associated with flat yield curves, meaning the short-term rate is zero but long-term rates are slightly positive. This circumstance impacts banking results in two ways. <\/p>\n Firstly, the advantage of having access to funding via unremunerated transactional deposits ceases to provide value. And secondly, with a flat yield curve, maturity transformation (borrowing short-term to lend long-term) simply loses its value. In other words, in a zero-rate environment, banking profitability basically comes from the provision of financial services to clients for which remuneration is received, since banking margins (the difference between the rates I pay for my liabilities and those I charge for my assets) narrow considerably. <\/p>\n Negative interest rates deserve separate consideration. I will not dwell on other adjectives I have used in the past, though not for lack of desire. The interest rate is the price paid to the consumer for foregoing consumption today to do so tomorrow. As tomorrow is uncertain, it is the reward for the sacrifice of saving. A negative rate means that this sacrifice is not rewarded and, furthermore, the decision not to spend in the present is penalized. I would not want my words to sound moralistic, but even though I understand the intention behind negative rates\u2014to incentivize consumption and investment at a time of sluggish economic growth in the Eurozone\u2014I believe that negative interest rates represent a serious distortion that can only be maintained for a brief period. <\/p>\n From the perspective of the banking business, the conclusion we can draw is the same. While zero rates imply that maturity transformation has no value, negative rates mean that value is destroyed in this maturity transformation process (fundamentally, due to the practical impossibility of applying negative rates to retail deposits, whose remuneration cannot fall below zero). Therefore, it is not a question of re-examining the viability of the banking business: with negative interest rates, the core of the business ceases to have value. Or, in other words, there is no viable banking business in the medium term in a world of negative rates. And this is especially true for commercial banks that, like Spanish banks, focus their activity on financing and providing services to the real economy, to families and businesses\u2014a business model that did not cause the crisis and, moreover, was able to withstand it quite well. This is the model that is at risk. <\/p>\n Banks could maintain their profitability by providing financial services to their clients, yes, of course, but like any other financial company. The good news is that I am convinced that sooner rather than later, negative rates will cease to be part of the financial landscape. And with that, difficulties will not disappear, as the next decade will probably be characterized by lower interest rates than those seen before the crisis (technically, elements such as technological change, weak global demand, or an aging population lead to a decrease in real equilibrium interest rates). But, qualitatively, low rates, even zero, have different implications than negative ones. <\/p>\n Another element of persistent difficulty is regulation. Specifically, there are three aspects of it that complicate the business: its stringency or harshness, its complexity, and its instability. Regarding the first, there is nothing to say: it is natural that after the crisis we have experienced, there is a desire to strengthen the solvency of banks. It is only worth remembering that there is probably a Laffer curve for solvency, that is, a point beyond which increases in requirements lead to more negative effects, for example, on the financing of the economy, than positive ones. Absolute security neither exists nor is desirable. The peace of cemeteries cannot be the objective of banking regulation. <\/p>\n Regarding complexity, the difficulty lies not only in higher compliance costs, or even in the excessive attention that managers must dedicate to these matters to the detriment of business management. The danger lies in the fact that, while one may have a general idea about the effect a specific measure can have, we do not know the effect of the cocktail of regulatory medicine being administered to banks. Therefore, I fear that the so-called impact studies are only crude approximations of the true global impact. At the very least, we should be pleased that regulatory authorities, the FSB in particular, have expressed their willingness to review the impact of approved regulations and to correct them if undesirable effects are observed. <\/p>\n Allow me to point out another paradox in this area. As is well known, with the launch of the Banking Union, our prudential supervisor has become the ECB (or, more precisely, the SSM, the combination of the ECB and national authorities). The ECB, as a supervisor, is being tough, alerting entities to their weaknesses in risk management, etc. Well, it is paradoxical that the ECB, with its prudential hat, demands caution in risk management, while with its <\/p>\n monetary hat, it encourages us to take on more risks, spurred by ultra-loose rates and various credit facilities. We are living in strange times. <\/p>\n Moving on to the digital challenge, allow me to be very brief. I believe we are all aware of the powerful combination of a change in demand and a decentralized supply provided by new specialized operators, the fintechs. Not only must we compete with potentially more efficient and specialized new operators (I reiterate here my vision on the deconstruction of the banking business), but our clients, across all age segments, want to interact with us through remote channels. And changes in demand are the most crucial, because either the bank responds to that change or it loses the client. Of course, banks have different views on the pace and depth of this change, but the important thing is that none ignore the need to face the challenge. <\/p>\n From the perspective of a sector under profitability pressures, this technological transformation is both a challenge and an opportunity. The element of opportunity lies in being able to respond to our clients’ needs with much more efficient cost structures. The key will be, of course, to avoid the risks of neglect in geographies, age segments, or sociological groups, but I sincerely believe that technology can allow us to not only maintain current levels of financial integration but even improve them. After all, the digital revolution in finance is enabling increased financial integration in much of the underdeveloped world, by providing access to financial products and services to broader segments of the population. <\/p>\n In summary, the technological challenge should not lead us to fall into neo-Luddism or a phobia of any technological innovation. I firmly believe that technology will lead us to more efficient and balanced societies, to fuller lives as consumers and more productive lives as workers. And that the banking sector will emerge stronger from the challenge, even if we cannot yet gauge the level of transformation it will undergo. <\/p>\n Allow me to conclude. The sector continues its slow improvement in a very demanding environment, a new normal, where neither volumes (credit evolution) nor margins will help in the short term, although the need for provisions should tend to decrease over time, and thus contribute to improving ROE. <\/p>\n Therefore, decisive action through cost control is essential, which not only improves efficiency but also allows banks to compete without complexes with new fintech operators. A normalization of interest rates will also contribute positively to improving margins, even considering that this normalization will not mean a return to the past, as we are probably facing a prolonged period of low interest rates. But the most relevant aspect of this entire situation is that AEB banks are perfectly aware of both the complex environment and the tools at their disposal to confront the challenges. Furthermore, they are reacting not with short-term views, but with a medium-term strategy. <\/p>\n I cannot conclude without a final reflection on the business model of our banks, which I have already referred to. I firmly believe that the Spanish model of commercial banking, close to the needs of its clients, whom it accompanies throughout their life cycle, not only remains viable but also guarantees the alignment between the interests of the client and those of the bank. That is, a bank that forgets the needs of a profitable client will see that client go to another competitor, and what is lost is not one year’s operations, but that client’s entire lifetime of business. <\/p>\n But we also cannot ignore that, like everything in life, the formula for success lies in attention to detail. Even the most solid and client-centric business models can fail. Evidently, in the millions of interactions between clients and our employees, complex situations, misunderstandings, and errors will occur: infallibility does not exist in human relationships, neither in this field nor in any other. But we must remember the levers that allow us to minimize risk: financial education, which generates demanding clients; network training, which guarantees professional excellence in increasingly complex environments; and, last but not least, the active promotion by management and the board of an appropriate banking culture that permeates the entire organization and endures over time. Only in this way will we achieve a long, fruitful, and satisfactory relationship with our clients for both parties. <\/p>\n Thank you very much.<\/p>\n Jos\u00e9 Mar\u00eda Rold\u00e1n, Chairman of the Spanish Banking Association<\/strong><\/p>\n","protected":false},"excerpt":{"rendered":" The levers that minimize risk: financial education, network training, and the active promotion by management and the board of an appropriate banking culture that permeates the entire organization and endures over time.<\/p>\n","protected":false},"featured_media":35974,"parent":0,"template":"","etiquetas":[287,294,331,327],"categorias-blog":[783],"class_list":["post-37320","blog-aeb","type-blog-aeb","status-publish","has-post-thumbnail","hentry","etiquetas-banca","etiquetas-banca-espanola","etiquetas-creditos","etiquetas-tipos-de-interes","categorias-blog-presidency"],"yoast_head":"\n