Banking, between the rate hike and the new tax

It had been more than seven years since the Spanish banks had been waiting for a rate hike.

Thomas Osborne
Thomas Osborne
30 July 2022 Saturday 16:52
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Banking, between the rate hike and the new tax

It had been more than seven years since the Spanish banks had been waiting for a rate hike. And when it has arrived, it has not been as planned in their strategic plans. The exit from the negative levels that began this month occurs in a situation of extremely high uncertainty (some use the term pre-crisis) in the face of runaway inflation, blockages in the supply chain, the incredible price of fuel and the war in Ukraine . And as if the uncertainty were not enough, the Government has improvised at the last moment a new tax that large entities will have to pay in the next two years for a value of about 3,000 million euros.

This week, the Governor of the Bank of Spain, Pablo Hernández de Cos, wanted to make it clear that the sector in Spain is in a better position to face the dark clouds that hang over the economy than it was in 2007. to the rate hike, which could reach 1.5%, in the words of Hernández de Cos himself, acknowledged that it is positive for banks' margins but also warned of the risks of the slowdown on delinquency, especially of the most vulnerable.

Pedro Pérez Iruela, managing partner of EY Financial Services, recognizes the good prospects that are opening up "after many years of zero or negative interest rates, in which the profitability of the banking business has been penalized". Pérez Iruela recalls that there will be a depreciation of portfolios because "variable-rate operations continue to weigh more heavily on the portfolios of Spanish banks, despite the boom in fixed-rate operations in recent years." Without doing anything, the banks will earn more for the mortgages granted years ago.

Francisco Uría, global head of banking at KPMG. He clarifies that "at the moment it is a moderate rise, so no major changes are anticipated on the side of the entities, although it will tend to improve their profitability." From International Financial Analysts (AFI), the banking consultant María Rodríguez maintains that the main negative effects are "the loss of value already produced in the fixed income portfolios and in the payment capacity of families and companies, in an environment of macroeconomic cooling.

When you go down to the details of the big banks and ask them directly – this week they all gave their opinion – about the short and medium term, there are clearer than clouds. Including the cloud of the aforementioned 3,000 million to pay in the new banking tax.

The CEO of Santander, José Antonio Álvarez, acknowledged that "the rate hike will help revenues have a better dynamic" while he expects to maintain costs. On delinquency, he acknowledged that "we do not see any deterioration in credit quality." A good horizon.

In other words, his counterpart at Sabadell, César González-Bueno, saw good prospects especially for 2023: "We expect a good performance, but we are not going to give forecasts beyond 2022. From 2023 we can only say that we expect the winds tailwinds are more favorable than headwinds.

From BBVA and CaixaBank they showed a little more doubts. The CEO of CaixaBank, Gonzalo Gortázar, spoke of uncertainties for next year. On rates, he said that “the rise will reach 1% in the European Central Bank (ECB). It is a very moderate rise, and it takes a certain time to impact our balance. We have uncertainty about the economic deterioration.”

Onur Genç, CEO of BBVA, in a very similar vein, said that "there is a lot of uncertainty" about the future and, therefore, in his opinion, the tax on banks "does not come at the right time."

Although there is no unanimity, the idea that is repeated the most in the offices of the leaders of the main entities is that the positive effects (rise in rates) will weigh more than the negative ones (default and tax on banks), although doubts remain on the effects of economic developments. Obviously, if Russia cuts off gas supplies, the recession will be a fact of unpredictable consequences.

“The financial sector is facing, like the Spanish economy as a whole, a context of greater uncertainty. However, it does so from a very solid position in terms of solvency, liquidity and even profitability, which distances us from the negative experience of the great global financial crisis of 2007”, reflects Uría (KPMG).

Could a new turn of the screw to the profitability of the sector lead to a new round of mergers or new job and office cuts? “It is certainly not ruled out that a worsening of the economic situation could be a situation in which new adjustments are valued that now do not seem foreseeable or are among the priorities of the sector. Yes, there will be sales of low-quality asset portfolios (non-performing)”, answers Pérez Iruela (EY).

In Rodríguez's opinion, "it is foreseeable that to the extent that revenues increase, efficiency will improve via revenues." The AFI analyst adds that a concentration operation "is an internal decision of the entities that will depend on the situation and capacity of each of them." There is no saber rattling for now in the offices of the big Spanish banks.

This week, Gortázar and Genç were especially critical of the competition of international banks in the Spanish environment in which they are exempt from paying the tax.

On a European scale, the position of Spanish banks is not bad: Uría (KPMG) considers that "Spanish banks face the current situation of economic uncertainty in a position that does not compare unfavorably with that of European banks once the The ECB has averted the greatest threat to the Spanish economy: the risk of financial fragmentation in the eurozone through the new monetary policy transmission instrument (TPI)”. Rodríguez adds that European banks start from “a less favorable situation than Spanish banks, highly retail, with a greater weight in the balance of loans at variable rates and a greater contribution from the margin”.

The last element that will determine the future of Spanish banking is the evolution of the so-called neobanks or fintech companies in the environment of rate hikes. “They have enjoyed in recent years almost unlimited access to financing that will probably change with the new market conditions. In this context of less liquidity, those new entrants that are capable of showing business models capable of being profitable in the short or medium term will be able to continue, but those that are not capable of doing so will have no other possibility to survive than to ally themselves with the banks traditional”, warns Uría (KPMG).

Rodríguez (AFI) believes that "fintech and neobanks will continue to maintain competition in the banking sector as a result of their positioning in niche businesses, including payment services and financing for consumption and SMEs, where they have with the advantage of being highly digital” and its lower cost structure.

After the long winter of interest rates, spring has come to Spanish banks. It remains to be seen if it comes with storms that ruin the harvest.