Banking is once again at the center of the social and political debate in Spain, although the most exceptional thing in the last 15 years has been the periods in which it has not occupied this uncomfortable and risky position with varying degrees of intensity . First, it was a consequence of the brutal crisis into which it contributed to dragging the country through the digestion of its excesses and mistakes during the real estate bubble (2008-2014). And then he responded to the collateral effects of what José Ignacio Goirigolzarri, then president of Bankia and now of CaixaBank, has called the sector’s “desert crossing”, caused by the depressive effect on its results from the era of official interest rates at zero and negative (2014-2021). At the end of this desert was an oasis of profit recovery, but marked by a political and reputational storm.
The umpteenth and last (or penultimate) cause of controversy for banking, thus, has been the presentation by the large entities of their results for the past year, which have come to be described as “absolutely shameless” by the United We Can wing of the Government (Minister Ione Belarra). The majority socialist side of the Executive did not want to go that far, but it did take the opportunity to vent about the temporary and extraordinary tax on the sector that it has promoted (ministers Nadia Calviño and María Jesús Montero). His argument is that the high profits show that the bank has “room” to pay the lien thanks to the supposed profit that has fallen from the sky brought by the accelerated increase in official rates by the European Central Bank (ECB) to combat the ‘inflationary spiral.
The large banks that have already presented results – 8 out of 10 – earned 21,146 million euros last year, 3.7% more than in 2021. The figure for the sector as a whole will be known when the Bank of Spain published in April, but it will be only slightly higher, since the entities that are missing to communicate results (two of the large ones and 143 of the small ones) have a much lower market share. Unsurprisingly, it should not deviate much from the 23,592 million euros of 2021. Is it a very high figure? To answer this question you have to see the matter with a certain perspective.
More than the historical average
Last year’s profits will not exceed the historical high of 30.64 billion established in 2007, a figure that, in any case, is a somewhat misleading reference: it can be considered that it was doped by the real estate bubble and that it hid the abundant losses that surfaced in the following years. The profits of 2022, on the other hand, will double the 11,783 million average annual profit of the sector between 2001 and 2021. Also if you take into account the effect of inflation (which makes an amount from years ago equal today day to a higher figure), the combined result of the past financial year will be above the annual average of 15,141 million this century.
Does this mean that they are excessive or unjustified benefits? Banks often argue that profits need to be seen in relation to their net worth to check whether or not their profitability covers the cost of capital, i.e. the ‘return required by investors to be willing to become part of the its shareholding”, as the Bank of Spain once defined it.
This is a very relevant element, because it theoretically measures the capacity of the entities to, in case of need, capture with more or less cost and difficulty the external capital with which, among other things, to finance the activity economic through loans to companies and families.
In the first nine months of last year, Spanish banks had a profit of 19,646 million, with a return on capital of 10.09%, above the annual average of 7.9% for the period 2001- 2021, but practically half of the doped levels close to 20% of the last years of the bubble.
In 2001, on the other hand, the entities earned less (10,675 million, the equivalent today of 16,774 million), but with a higher profitability (13.4%). This is because the European banking authorities have forced the sector to shoot up its net worth – in Spain, from 115,116 million euros (equivalent to 180,891 million today) to 259,682 million euros – with the aim to generate a bigger piggy bank that prevents the next financial crisis from having a multimillion-dollar cost to public coffers as high as the one in the period 2008-2014.
Minimum required
Banking, therefore, is today a safer and less profitable sector. But does it not cover the minimum required by the market? It is true that this happened during the financial crisis, due to the indispensable and expensive consolidation of its balance sheet (its average annual return on capital was 3.3% between 2008 and 2014). Also in the years of negative ECB rates, which sank their income (4.7% on average between 2015 and 2021). In both periods, the cost of capital was not reached on average (always above 6% and with peaks above 10% and up to 12%, according to a 2020 Bank of Spain study). But it’s not so clear that will continue to happen now. The supervisory body estimates that the return until June (10%) “slightly” exceeds the level demanded by investors (7%).
The problem is that this cost of capital is not fixed and observable, but rather a somewhat subjective estimate. The entities defend that it is higher than the supervisor calculates (between 10% and 18%, depending on the bank’s risk profile), which means that it would still not have been overcome by profitability. In fact, the market value of most listed banks remains below book value despite the stock market gains of the past year, a sign that investors think profitability remains insufficient.
Reputational backpack
Whether or not it reaches the level required by the market, the increase in banking profitability in the last two financial years comes after 12 years at a clearly insufficient level. Why then are their results so controversial? Beyond the elements of political strategy in an election year, the truth is that the sector is carrying a heavy backpack on its reputation since the previous crisis (public rescues with abundant losses, preferences, mortgage land clauses, evictions… ).
Between being forced by the authorities and judges and on their own initiative, the bank more or less corrected these mistakes. During the worst moment of the pandemic, he also managed to lighten his reputational backpack thanks to measures such as the distribution of ICO credits to companies and the opening of offices during the confinement of 2020. Even María Jesús Montero, minister of Finance and then also spokesperson for the Government, publicly thanked him for his contribution after a Council of Ministers, something unthinkable until recently, but also today.
In the last two years, the weight of the backpack has increased again. On the one hand, it suffers from the collateral effects of the measures adopted by the sector to combat its low profitability in previous years, such as the increase in the collection of commissions from clients or the reduction in the number of employees and offices ( 40% and 60% since the peaks of 2008), which worsened its face-to-face service, particularly to the elderly and in rural Spain.
In any case, it is likely that what is weighing the most on the image of the sector in the eyes of society today is that the ECB’s rate hike has translated into a strong increase in the price of credit – both the already granted and the new, and particularly in mortgages – which is not being accompanied by an equivalent and parallel increase in the profitability that pays for deposits, the savings product par excellence.