Spanish banks, ready to weather the new interest rate scenario better than the rest of Europe

The banking manna of interest rate increases is going to begin to run out. The ECB is preparing for next week a first reduction in the price of money that will represent a turning point, the beginning of a downward path after an upward swing for rates unprecedented in the history of the euro. The June cut will be the first, although the date for the second is very uncertain and could be delayed in time, which gives banks room to continue fattening their income statement with rates that will continue to hover around two-decade highs. Spanish banks will be able to continue enjoying a favorable business margin in their most essential activity, which consists of lending at an interest rate higher than that paid for their clients’ savings. And it will be able to continue doing so to a greater extent than other European banks, as several international analysis firms agree. In short, the rate cut does not currently aim to weaken a sector that has achieved record profits thanks to the increase in the price of money and that is expected to have another brilliant 2024 in results and dividend payments.

The results of the first quarter have been a first thermometer of the state of health of the Spanish banks and the favorable starting point with which they face the rate reduction which, fortunately for the sector, is going to be much less intense than expected this year. . In view of the accounts as of March, there have been upward adjustments to valuations and forecasts for Spanish banks, which have added notable revaluations on the stock market so far this year and for which the market continues to see potential. For Deutsche Bank, “Spanish banks continue to demonstrate that they are better prepared than most of their southern European counterparts to maintain good levels of performance, not only by taking better advantage of expectations of higher longer-term rates, but, More importantly, they are probably more resistant to rate cuts than most of their counterparts.”

The main reason for this resistance is the strength of the intermediation margin, which will benefit from higher rates for longer but also from a differential element in Spanish banking, which has been paying less for its clients’ deposits than its European neighbors and that will also begin to reduce this remuneration for savings with the rate cut. In addition, a slight improvement is expected in the granting of mortgages in the coming months, which would also contribute to supporting the business. As Jefferies points out, “loan growth remained moderate; However, the first signs of recovery in mortgages, together with the favorable dynamics of consumer credit, led some banks to revise upward their previous growth expectations for this year.” The US bank has also updated its forecasts for Spanish banking upwards in light of the first quarter results. It has raised its earnings per share estimate for 2024 and 2025 by between 1% and 5% on average, mainly due to the “strong momentum” for domestic activity.

KBW has also revised upward its earnings per share estimates for Spanish banks, and also Italian banks, by 4% for each year between 2024 and 2026. The firm agrees that, despite the rate cut, the dynamics for The interest margin remains attractive, in a sort of ideal scenario in which high rates will continue for some time, while the cost of deposits has already begun to fall. KBW even claims that domestic banks in southern Europe are well placed to post double-digit profitability ratios (RoTE) in an environment of rate normalization.

Analysts point out that the sensitivity of banks to the price of money has decreased in recent times. Thus, while the rate increases that began in 2022 have had the ability to trigger business margins, the decrease in the price of money is not expected to have the same impact in the opposite direction. Banks have taken advantage of this time to reinforce commission income with the sale of investment funds, to extract profits from their fixed income portfolio and to protect themselves with interest rate hedging. CaixaBank, the retail banking leader in Spain by market share and a clear beneficiary of the increases in the price of money, now offers Bank of America the best combination in southern European banking between growth in margins and business and capital distribution to the shareholder, together with the Italian Intesa San Paolo.

The entity chaired by José Ignacio Goirigolzarri, which has advanced 38% on the stock market this year, is the favorite in Spanish banking for José Ramón Iturriaga, Abante’s fund manager, who maintains a long-standing commitment to the sector. “We see reasons for Spanish banks to continue rising on the stock market. The rate scenario has changed a lot compared to the beginning of the year, but for good reason, and that is that the economy, and inflation, are holding up better than expected. Rates will fall at a slow pace and that is an ideal scenario for banks. The entities also continue to quote at a discount,” he explains. Despite the rise on the stock market of almost 60% in the last year, Santander is still trading at a discount of more than 20% on book value, which in the case of Unicaja increases to 45% and in Sabadell, to 25%. For Bank of America, it is precisely the discount that makes Santander its favorite Spanish entity, to which it grants an increase potential of 25%. The American firm also considers that Sabadell’s interest margin will be more resilient than that of the rest of its Spanish competitors, despite the fact that BBVA’s takeover bid poses the risk of loss of business during its processing. KBW also foresees a higher interest margin for Sabadell in 2025 and 2026.

For Javier Galán, manager of the Spanish Stock Exchange of Renta 4, this discount with which Spanish banks insist on trading – with the exception of Bankinter and BBVA, at the edge of their book value – despite enjoying such a favorable rate environment However, high rates are a sign of a shared structural problem in the sector, of high capital consumption for low returns. Galán joins the group of investors, rare in the market as a whole, who avoid banking and appreciate more opportunities for future growth in other sectors, such as technology or health.

Dividends and mergers

Dividend profitability is in any case a claim that some financial entities present to the market, beyond structural debates about the banking business model. Caixabank offers an estimated dividend yield for this year of 9% and higher than 8% for 2025 and 2026. BBVA’s is close to 8% for this year and is rising for the next two years, according to KBW estimates. Thanks to the rate increases, Spanish entities have recovered generous shareholder remuneration, which has made it possible to recover cash payments and combine them with share buyback programs, the route that the sector is exploiting to channel the excess of funds to the shareholder. capital that is accumulating with the generation of record profits.

Faced with a recognized solvency position, the Bank of Spain has decided to activate the anti-crisis capital reserve cushion and will require entities to provide 7.5 billion euros more in reserves in 2025 and 2026. This greater requirement in anticipation of lean times has already been established in other European countries and is expected to be acceptable for the sector, according to Jefferies. “We see a manageable impact from higher capital requirements, and no immediate risk to banks’ stated CET1 ratio targets or capital distribution plans,” defends the US firm.

Despite the horizon of lower rates, the market does not fear either for the business or for the banks’ dividends. Nor
in the case of BBVA despite the hostile takeover it has launched against Sabadell. The shares of the entity chaired by Carlos Torres have fallen 8.3% since the announcement, but the bank maintains the favor of analysts, who see strategic interest in the operation and also appreciate BBVA’s business alone. In any case, the high uncertainty surrounding the takeover bid and its long processing time will be a factor that weighs on the price, sufficient reason in the opinion of Bank of America for a neutral recommendation on the value. BBVA is, on the other hand, the favorite bank in southern Europe for KBW, along with Unicredit.

If BBVA’s takeover bid for Sabadell goes ahead, Unicaja would remain the only option, the most obvious, for a new corporate operation in Spain. The expectations of a purchase offer are always an incentive for a stock on the stock market, although in the case of Unicaja doubts arise. As potential buyers, “CaixaBank and BBVA would already be too big, the strategic differences with Bankinter are too many and Santander is probably too busy with its internal reorganization and with its focus on other geographies,” they point out in KBW. Iturriaga, in the heat of corporate movements, does maintain his bet on Sabadell and Unicaja.

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