The Bank of Spain believes that the negative effect of lower interest rates on the profitability of Spanish banks should be “limited and gradual”, and offset, at least in part, by the increase in the volume of loans. Any downward pressure on banks’ margins would be offset, at least in part, by a more favorable evolution of the volume of activity, according to the semi-annual financial stability report of the regulator.
Spanish banks benefited when interest rates rose to deal with escalating inflation in 2022 and 2023, as financial institutions increased the rates they charged on loans and limited what they paid for deposits. That tailwind is now reversing and European banks are having to adapt to a changing market environment as benchmark interest rates fall.
In the first half of this year, the consolidated net profit of Spanish banks increased by 22% year-on-year, which raised their return on equity ratio (ROE) by 2.2 percentage points, to 13.9%, according to the Bank of Spain report. Net interest margin (i.e. lending profits minus deposit costs) increased 14.5% year-on-year through June, down from the 27% increase recorded in the first half of 2023.
Banks hope that lower borrowing costs will boost lending activity. In this context, the volume of loans to the private sector in Spain has resumed an upward trend and grew by a seasonally adjusted 0.5% between May and August.
bank tax
On the other hand, the Bank of Spain has indicated that concerns about the new banking tax “may be greater”, compared to the situation of the current tax that is applied temporarily and in a context of high profits.
Asked in the presentation of the Autumn 2024 Financial Stability Report about the possible new design of the tax, the general director of Financial Stability, Regulation and Resolution of the Bank of Spain, Ángel Estrada, recalled the opinion that the European Central Bank (ECB ) issued on the temporary tax in the fall of 2022 and in which it warned of the risks that the tax did not adapt to the cycle and had a “rather countercyclical” behavior that could affect higher risk activities, which entail higher interest margins and that are offset by higher provisions.
By making this tax permanent, Estrada points out that the concerns indicated by the ECB “may be greater” compared to the current situation, where a transitory impact of the measure was estimated and in an environment of high profits. However, he has pointed out that the proposed new design would mitigate the impact on the cyclic part, but that it increases the complexity “significantly.”
Through an amendment to the bill to create a global tax of 15% on large multinationals, the PSOE has proposed changing the figure of the banking tax, changing it from a non-tax property benefit to a tax itself, but maintaining that the interest margin and net commissions are taxed.
The idea is to have this figure for the next three years, until 2028, and for the rate to go from 4.8% to a progressive one that would go from 1% to 6% depending on the liquidable base. In addition, it will allow the deduction of 25% of the Corporate Tax payment and an extraordinary deduction is established in the event that entities suffer a sustained decrease in their profitability, something that is not contemplated in the current tax.
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