The uncertainty is very high, so the bank supervisor will ask the entities to continue accumulating provisions for what may come. This was stated this Thursday by Mercedes Olano, general director of Supervision of the Bank of Spain, during the presentation of the Supervision Report for 2020. “We do not know how far the delinquency in banks will reach because it is related to the control of the pandemic. With the problems of vaccination by AstraZeneca, the uncertainty has moved beyond September. In any case, banks will need to continue increasing provisions despite making extraordinary contributions in 2020, “he said.
The big banks contributed 40,000 million euros last year, which led to big drops in profits. The directors of these entities commented that this amount would be enough, but the supervisor warns them that they will need more mattresses in the face of the crisis.
The direct consequence of these provisions is that the profitability of the sector will not continue to improve. Mercedes Olano considers that profitability will continue to decline in 2021 due to extraordinary provisions, although she points out that recurring business is improving in the sector’s income statements.
Regarding the government’s plan to restructure ICO loans with the banks, Olano did not predict a negative impact on the delinquency of the entities’ accounts. “They will be renegotiated in the best possible way and the ICO guarantees will accompany the different possible refinancing formulas,” he commented.
The Report points out that the profitability of Spanish entities, measured in terms of RoE (return on equity), “It has fallen significantly in 2020, especially as a consequence of the extraordinary clean-ups carried out as a result of the crisis derived from the pandemic. It is between 5% and 8%, remaining below the estimated cost of capital ”.
More mergers without oligopoly
Regarding new mergers, after Bankia with CaixaBank and Unicaja with Liberbank, the Supervision Report states that “it is not ruled out that other entities try to participate in a merger process in the future with the intention of improving their profitability, earning size and be more competitive ”. However, Olano considers that “the risk of oligopoly is not close. You just have to go out into the street to see that the banking competition is very lively ”.
However, he pointed out that the reductions in offices and staff will continue because the advance of digitization is causing less and less business in branches and for employees dedicated to product placement.
Regarding supervisory priorities in 2021, the Report cites the “prolonged impact of the pandemic on economic activity and the potential increase in non-performing assets; price correction in financial markets; cybercrime and technological challenges, and geopolitical uncertainties ”.
They have also detected other risk factors, such as those related to money laundering and terrorist financing, climate change or the risks associated with Brexit.
Among the internal vulnerabilities of the entities, they point to problems “in the management and coverage of credit risk, low structural levels of income and low profitability, deficiencies in information technology (IT), governance and strategic management that can be improved, persistent inefficiencies in terms of costs, high levels of public and private debt, excess capacity in the banking sector, and fragmentation in the regulatory and legal framework ”.
That is why they have asked entities to strengthen credit risk management, strengthen entities’ capital and seek sustainable business models.
Penalties for lack of transparency
Regarding sanctions, the Bank of Spain imposed them on eight entities in 2020 despite the suspension of administrative deadlines between March 14 and June 1 due to the state of alarm decreed by the Government against the coronavirus.
The main reasons are problems with transparency and protection of the banking clientele, “where it continues to be the area in which the largest number of sanctioning proceedings is concentrated,” says the Report.
In 2020, it also initiated three new files against eight entities and resumed one that had been suspended for several years for criminal prejudice against a savings bank, its administration and management positions and the members of its control commission.
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