Assets will continue repricing but the cost of deposits is starting, slowly but convincingly, to pick up. Net new production is and will remain muted for the rest of the year, providing no upside to interest income. There has been little evidence of competition for deposits so far, as excess liquidity is still in the system so while deposit beta has picked up, especially for corporates, it is still among the lowest in Europe.

“Margins will remain the only driver for NII for 2023, as overall books are flat to shrinking, yields of securities in ALCO portfolios are rising and are expected to continue to contribute to the top line hence offset the impact of monetary policy changes,” said Chiara Romano, associate director in Scope’s financial institutions team. “Stronger earnings have supported upward revisions in pay-out ratios and, more recently, new rounds of share buy-backs.”

Return on equity improved across the board in the second quarter, rising to 13% on average from 10% in the prior quarter for our sample (Santander, BBVA, Bankinter, CaixaBank, Sabadell and Unicaja). Operating income rose by 11% on average, supported by the windfall tax on 2022 core revenues that was levied in Q1. The tax charge on the banks in our sample was EUR 1.1bn in 2023, and we expect an additional EUR 2bn charge in 2024.

Spanish bank profitability (ROE) rises QoQ and YoY

Source: SNL, Scope Ratings

The stock of doubtful loans to the private sector showed a marginal increase from the lows of March 2023 but asset quality remains resilient overall. The decline in stage 3 loans seems to have reached its end, however. Stage 2 loans are flat year-on-year, albeit 150bp above pre-Covid levels, but Spanish banks compare favourably on this metric with most banks in Europe.

“We do expect some credit deterioration to materialise but with some delay,” Romano said. “On the plus side, coverage levels have strengthened considerably and macro overlays are sitting partially unused. Specific portfolios, such as highly leveraged corporate debt and consumer finance are more at risk in this environment but we deem the build-up of provisions as an adequate shield against materially higher impairments. Positive signals also come from some banks adjusting slightly downward cost of risk guidance for the year.”

The outcome of the 2023 stress tests was especially positive for Spanish lenders, demonstrating how resilient they are to downturns. Solvency ratios show adequate buffers to minimum requirements. This is the case also under stress. With limited capital drawdowns under the 2025 adverse scenario, Spanish banks were among the best performers in the stress tests. Rising retained earnings are supporting the build-up of excess capital. All banks now stand adequately above their respective guidance.

Download the Spanish Bank Quarterly here.

Issuer rating reports are available to ScopeOne subscribers:

Banco Bilbao Vizcaya Argentaria SA

Banco Santander SA

Banco de Sabadell SA

Bankinter SA

Kutxabank SA

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