Spanish banks reached their maximum profitability in 2023, thanks to a “significant improvement” in interest margins, limited provisions for insolvencies and cost containment, among other elements, according to forecasts for next year prepared by domain ratings.
The company notes that a revaluation of deposits and a slight increase in the cost of risks can cause a “moderate” decrease in overall profitability, although it believes that this profitability, along with the quality of controlled assets and sufficient capital positions, will continue to support the credit profile of Spanish banks next year.
According to analysts of range ratings, the main driver of profitability in the third quarter of 2023 was, again, the interest margin, which continued to grow, albeit at a “slower” pace than in the second quarter for most banks.
“The important variable interest rate component of the Spanish interest rate portfolios allowed for the continuous revaluation of assets after the recent interest rate hike, while the growth of interest rates in emerging markets favored an increase in the brokerage margin,”he points out.
Thus, you expect the improvement in the brokerage margin to continue at least during the first half of 2024, as variable mortgages still account for about 68% of the total.
However, he believes that the revaluation of deposits will put pressure on brokerage margins in 2024, because retail clients are increasingly “changing” current accounts for term deposits.
On this issue, the range ratings indicate that deposit inflows from households and companies continued in the third quarter, although the forecast is “heterogeneous” among entities.
In Spain, in particular, the third quarter compared to the second quarter showed a positive trend for Santander and Caixabank, with deposit growth of 2.3% and 1.2%, respectively, while bpfa and Sabadell showed outflows, with a decrease of 0.9% and 0.5%, respectively, but at a slower pace than in previous quarters. “We consider this a possible change of direction,”he says.
“We expect this volatility to continue for a few quarters, due to the need for liquidity and access to savings to cope with tightening economic conditions. However, in contrast to the general decrease in demand deposits in all banks, there was a change in the composition and a steady quarterly increase in term deposits as a percentage of total deposits. This reflects customers ‘ preferences for higher-paying savings,”he said.
Next, he highlights that Spanish banks accelerated the transition of official interest rates to term deposits to 41% in the first half of 2023 at an aggregate level, compared to 16.3% at the end of 2022, which will help stabilize the deposit base, despite the “negative” impact on net interest margins. Therefore, the company believes that there will be a “slight decrease” in revenue in 2024.
On the other hand, domain Ratings analysts, Carola A.Saldias Castillo and Marco Troiano, that the performance gap between domestic and international operations will increase in 2024 mainly due to higher growth in emerging markets and lower credit volumes in Spain as demand adapts to low growth expectations and interest rates that will remain high.
In this sense, the company expects that the growth of the Spanish economy in 2024 will maintain its resistance and continue to exceed the average growth of the eurozone, although it will show a marginal slowdown to 1.8%, from 2.3% in 2023.
As for asset quality, the range ratings indicate that it has remained stable: “the four banks in our sample (Santander, BBF, Caixabank and sabdel) have a delinquency below the average of the Spanish banking sector as of September 2023, partly as a result of their geographical mix, but also as a reflection of proactive exposure management,” he says.
However, he believes that the decline in delinquency cases may have reached rock bottom. In this way, you expect some deterioration in the first half of 2024 due to consumption trends at first, and finally to “weak” SMEs and specific business sectors, where low growth and high interest rates affect credit quality.
On the other hand, “good behavior” is observed in the mortgage portfolios of households due to the strength of the labor market.
As for extraordinary costs, the analysis refers to the extraordinary tax approved by the government for 2023 and 2024 that was “easily absorbed” by increasing profits, so it is believed that it is “unlikely” to affect the results in 2024.
The scenario of the base for band assessments does not consider extending the tax for a longer period. However, he claims that the spread of taxes on unexpected profits of banks in EU countries supports his view that banks are considered “semi-utilities”. Therefore, he does not exclude that in the medium term, new initiatives may appear that may reduce the profitability of banks.
Finally, the company expects that the capital ratio in CT-1 will remain “practically unchanged” in 2024, as the excess capital is effectively managed by increasing payments to shareholders. It should be noted that profits will continue to generate organic capital, since, in the context of limited demand, the growth of risk-weighted assets remains moderate, while payment may exceed capital formation, “subject to approval by the authorities”, which will lead to a “slow but steady convergence towards medium-term capital goals”.