By Chiara Romano, Associate Director, Financial Institutions

From an earnings perspective, 2023 is expected to be markedly positive for Spanish banks. Pre-provision profitability, the first line of defence against credit losses, will further strengthen. However, as the macro picture deteriorates, the ECB and Bank of Spain are recommending prudence with respect to capital planning policies.

Spanish banks increased dividends and, in some cases, carried out sizeable share buybacks in 2022. Pay-out ratios now stand at the upper end of banks’ initial guidance, or guidance was revised upwards. For the large banks in our sample, pay-out stands between 40% and 60%. Organic capital formation was satisfying last year. In some cases, it more than offset distributions and other market impacts.

Core capital ratios stand ahead of or in line with the banks’ medium-term targets, with some room still to go. With the bullish outlook for profitability in 2023, more upward revisions of shareholder remuneration have not so far been excluded.

Banks above or in line with targets

Kutxabank does not have a public target. Mid-range MT CET1 % target Source: Company data, Scope Ratings

CET1 buffer to requirements exceeds 300bp

Data as of Q3 2022 
Source: Company data, Scope Ratings

While at an absolute level the average CET1 ratio of Spanish banks compares less favourably with banking sectors in other European countries, we believe it represent an adequate second line of defence. We deem Spanish banks to be well capitalised: in Q3 2022 the median buffer of the CET1 ratio to minimum requirement stood at around 420bp and the median buffer to MDA at 390bp.

Looking ahead, buffers will remain solid, despite the recent increases in requirements affecting several institutions. For BBVA and Santander, the Pillar 2 requirement increased slightly (by 21bp and 8bp respectively) driven by the ECB’s prudential expectations on calendar provisioning of NPLs (which BBVA was previously deducting from CET1). CaixaBank saw an increase of 125bp in its O-SII buffer (now fully phased-in and reflecting its systemic footprint after the merger with Bankia) while Sabadell saw its Countercyclical Capital Buffer increase by 19bp, driven by the UK requirement (Sabadell owns TSB Bank). Unicaja saw its Pillar 2 requirement increase by 10bp. These increases are marginal and well within the banks’ ability to generate capital organically given the tailwinds to interest revenues.

As the effects of slower growth on asset quality only materialise with a delay, we expect banks will take a conservative stance to additional distributions. This will not only appease regulators, but also credit investors.

Scope has subscription ratings on:

• Banco Bilbao Vizcaya Argentaria SA
• Banco Santander SA
• Banco de Sabadell SA
• Bankinter SA
• Ibercaja Banco SA
• Kutxabank SA

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