The strong tightening of monetary policy orchestrated by the European Central Bank (ECB) has been great for the banks of the Old Continent. The party spread to practically the entire sector, and many of the financial institutions were able to achieve historic profits in the last two years, driven by a higher income item. But in terms of profitability, in the first nine months of 2024, the gold medal was won by the large Spanish banks, which, together with the Italian banks, surpassed the European average, benefiting from a greater sensitivity to rising interest rates.
From January to September, the profitability on tangible equity (RoTE) of the large Spanish banks was above 15% – with the exception of Sabadell and Unicaja -, four points more than the European average, according to data prepared by Neovantas. “Many entities have exceeded the market’s expectations and all would be covering the cost of capital or would be very close to doing soexcept Unicaja,” the consulting firm pointed out.
The greater sensitivity to rising rates is due to the business model. The client portfolio of Spanish banks is highly biased towards clients with mortgages, especially at variable rates, which have appreciated with the rise of the Euribor. “This product is a great generator of interest margin,” said José Luis Cortina, president of Neovantas. On the other hand, in other countries, such as Germany or the United Kingdom, the mortgage portfolio has less weight and, within it, loans with fixed installments are more common.
Costs under control
Higher profitability is also due to the ability to keep costs under control, which gave Spanish entities a more attractive efficiency ratio than the European average, standing at around 40-45%. “In the last 10 years, Spanish banking has had a restructuring process and stronger consolidation than in other countries, leading to a very aggressive cost reduction. They have fired many people and closed many offices,” Cortina added. The CaixaBank-Bankia and Unicaja-Liberbank unions were clear examples.
Limiting the analysis to the national business, Santander stood out as the most profitable entity, enjoying a RoTE that far exceeded 20% (21.8%). BBVA followed, with a group-level profitability of 20.1%, since the bank does not usually break down this metric in its different markets. Bankinter also entered the podium with a RoTE of 18.2%, closely followed by CaixaBank (16.9%). For its part, Sabadell fell below 15% (14.3%) and the red lantern was Unicaja (6.8%). Of course, although the Malaga entity fell behind its competitors, it managed to increase its profitability by almost 48% compared to a year ago. Italian banks also boasted a higher RoTE than the European average: UniCredit’s rose 1.4 percentage points in its year-on-year variation, up to 19.7%.
Less joy in other countries
In the rest of Europe, the results were gratifying, but the euphoria was more controlled. In France, Crédit Agricole (14.5%) was ahead of BNP Paribas (11.8%) – the country’s largest – and Société Générale (9.6%). The German Deutsche Bank improved its profitability by almost three percentage points since last year and reached 10.2%, but it was still below the majority of Spanish banks. In the Netherlands, ING closed the first nine months of the year with RoE (return on equity), another benchmark metric to measure a bank’s profitability, of 13.8%. In the United Kingdom, HSBC posted a RoTE of 19.3%, in line with Spanish and Italian entities, while the profitability of Barclays (12.3%) and Lloyds (14%) lagged behind.
In the last two or three years, the profitability gap between Spanish banks and European banks has widened with the substantial rise in interest rates. Now, the other side of the coin is that, in an environment of falling rates, Spanish banks could be more vulnerable. “Now the lean times are coming because money will be cheaper, but the banks already anticipated it. Nobody expected that rates would remain at 4%, hence the entities reduced that sensitivity,” said Nuria Álvarez, analyst at Renta 4.
In fact, in the latest results presentations, the CEOs of the banks have insisted that a increase in business volume It will compensate for the reduction in the interest margin due to a more lax monetary policy. “Spanish banks are working hard on the marketing of off-balance sheet products that are not as affected by interest rates, such as insurance, which does generate commissions,” Cortina explained. Likewise, the ability of banks to keep risk costs stable so that they put as little pressure on net profits as possible will play an important role.
More moderate profitability
According to Álvarez, profitability should moderate in the next two years, but if banks do their homework properly, it will continue to be close to historical levels. “We will see double-digit RoEs in an environment of normalized rates, between 2% and 2.5%. It is something that they did not have before the ECB began to raise rates, since we had years of negative rates,” he added. Cortina agreed with this, emphasizing that the tax on the sector, whose new progressive design was approved two years ago, weeks, will also potentially affect profitability. “CaixaBank is going to suffer. A BBVA, especially if it ends up absorbing Sabadell, too,” he stated.
Banks are already doing their math on business forecasts for the coming years. Gonzalo Gortázar, CEO of CaixaBank, said a few weeks ago in the presentation of the 2025-2027 strategic plan that he plans to place the RoTE at 12%, when last June this parameter already reached 16.9%. Outside Spain, the main French bank, BNP Paribas, projects a profitability of over 11% next year, slightly below its current value. And the forecasts of the Italian group UniCredit are even more conservative, with a RoTE expected to be above 15% in 2025 and 2026, four tenths lower than this year.
#large #Spanish #banks #lead #profitability #Europe #high #rates
