Years of ‘fat cows’ for banking are coming

The position of the European Central Bank (ECB) of bringing forward a possible rise in interest rates to this year to correct inflation leads one to anticipate that times of fat cows will come for banks, as their stock prices already reflect during the last week in a burst of optimism. However, beyond the effect a rate upgrade will have on your accounts, as between 60% and 70% of its mortgage portfolio is referenced to variable, the sector will have to face the disarmament of the stimuli put in place during the pandemic with its pertinent challenges at the same time. In the balance, positive effects are weighed, such as the impact of the arrival of European funds or the synergies that the adjustments made will leave, but on the negative side there remains the uncertainty about delinquency or the end of cheap liquidity. The experts consulted by the Economist they predict that this will be the year of the last effort towards normality where the positive points will prevail over the negative ones.

Up to 20% profit improvement

The rise in rates has an immediate impact on the interest margin of the banks, and especially of the Spanish ones, where the bulk of their mortgage portfolio is still referenced to variable, boosting income and, with them, profit. UBS analysts forecast that a rise in interest rates of 50 basis points would raise the interest margin of Spanish entities by between 8% and 10% and profit by between 15% and 20%. This impact would be fully reflected in the accounts in two years for loan repricing periods. The improvement in results would consolidate the boom in the sector, which closed a good 2021, with 16,650 million profits without extraordinary items, 23% more than in 2019.

Cost reduction after digesting adjustments

Banks took advantage of the worst moments of the pandemic to launch efficiency plans, both through EREs and early retirements, within the framework of the pressure received by supervisors to cut costs with the aim of improving efficiency and profitability of the sector that hit negative ground in 2020 due to the high provisions to face Covid-19. Also, as in the last great crisis, there has been a restructuring of the sector with two mergers as protagonists, CaixaBank-Bankia and Unicaja-Liberbank, also promoting the respective network adjustments. With the exception of Bankinter, the country’s listed entities have assumed some costs of 4,600 million euros to finance the adjustments, which have resulted in more than 17,100 employee departures through the EREs. On the sidelines, Unicaja and Liberbank also launched early retirement plans for some 1,200 workers. The adjustments have already begun to be reflected in the improvement in costs, although it will be in 2023 when the economic effort will be digested and all the synergies will be seen, which, according to the advances made by the banks in their different plans, can scale in their together to 2,700 million euros per year.

Capital will return to focus at the start of 2023

With the reactivation and once the resistance of the banking system has been tested, the ECB will dismantle the extraordinary support. On the one hand, it will discontinue the arbitrated programs to ensure credit with sufficient and cheap liquidity (the repurchase of debt and, presumably, also the TLTROs) and, on the other hand, it will withdraw the facilities given to banks so that they lend: it will not extend the relaxation in the calculation of leverage and from 2023 entities will not be able to place their capital below the regulatory minimum. Brought to Spain is not, in principle, a great challenge since the CET1 ratio stood at 13.66% in September -the latest data known- and the total capital at 17.46% compared to the 10.6% required in CET1 on average from European banks. Now, an indicator that the market is following with interest returns to focus and the use of surplus piggy banks could be complicated if that implies placing it below comparable entities. Precisely BBVA and CaixaBank will use their comfortable rate this year to reward the investor with the repurchase of shares. It remains to be seen what happens after 2023 since European banking has a CET1 of 15.47%.

Moderate and manageable increases in non-performing loans

One of the great unknowns of the crisis unleashed by the pandemic and that has punished accounts via provisions for two years is how many defaults will surface, when and where? The main doubts focus on the defaults linked to the guarantees of the Official Credit Institute (ICO), whose expiration will begin to take place in June, and the business mortality when the bankruptcy moratoriums are lifted. S&P Global limits the rise in delinquencies to 7% this year, although banks expect a lower impact, closer to 5-6% compared to the current 4.29% -November data-. 14% of the balance sheet exposure is in the most vulnerable sectors, but experts and entities are convinced that the rise will be moderate and manageable. “There has not been an excessive commitment to real estate, the problem has been a health shock that has forced them to be locked up, not to produce in many cases, not being able to send many things by transport, but when that is over and it can be normalized and removed price tensions, energy tensions, the economy will be as it was in 2019 or the beginning of 2020 and with a more capitalized bank”, explains the Funcas economist, Santiago Carbó, emphasizing that he has large piggy banks of provisions for the impact on ICOs. He also minimizes frights from zoombie companies: “I guess the sector has identified them and I would know that sooner or later they will have a problem”assumes convinced that this knowledge will help to clean up positions soon and values ​​that the moratoriums will have helped other companies to put the house in order and not fall.

Mortgages: magnifying glass on new customers

For the pure mortgage part, the partner of International Financial Analysts (AFI), José Manuel Amor, rules out scares, even though the Euribor climbs 50 basis points. “Obviously it would be a small shock for mortgages,” he admits, to specify: “a good part of the mortgages are at a fixed rate, then we have people with a fairly positive employment situation and house prices have been rising, then you have a situation where there is positive mortgage equity and home value, then the probability that they will default is much lower.” Where would be the problem? “As always, in the last entrants to the labor market, those who enter with higher loans in relation to the value of the house or with the most precarious work”, he concludes.

The end of ICO deficiencies, decisive

The financial sector sees the arrival of the second quarter of the year as key to knowing what path the extraordinary provisions made in 2020 will take to deal with future defaults left by the pandemic. At the moment, groups with an international presence, such as Santander and Sabadell, have lowered the piggy bank in foreign subsidiaries due to the progress of the economy, but in the case of Spain, the group of entities will wait to know the payment capacity of the clients who requested credits guaranteed by the ICO once the grace periods end, the bulk of which, around 80%, will be between April and June. The bank has a piggy bank close to 100,000 million euros to deal with defaults, of which 40% are intended to cover losses from non-performing loans. If the delinquency remains manageable, it will release part, breathing oxygen into the results.