2023-05-01 06:04:36
He banking sector has lived a month of March marked by the instability and the uncertainty behind the Silicon Valley Bank (SVB) bankruptcy and the Credit Suisse issues. The volatility unleashed in the market has aroused fears of a evasion of deposits and even credit tightening that will harm, to a greater extent, smaller entities. However, Fitch highlights that there is four medium-sized banks in Spain that they are well positioned to face the expected weakening in asset quality.
Unicaja, bank, Ibercaja y Kutxabank are, according to the rating agency, the ones that are best placed to cope with a context of economic slowdown thanks to increase your profitability Yet the strength of your depositswhich “provide resilience”.
Kutxabank is the highest rated bank by Fitch (BBB+/Stable) due to its solid capitalization and his low risk profile.
The ratings of the other three entities (BBB-/Stable) are the result of the strong regional franchiseswhich, for the agency, support large and stable deposit basesimproved asset quality indicators and adequate capital, with weak profitability levels, “but improving”.
“Banks’ impaired loan ratios are the lowest in a decade, capital ratios are above or in line with medium-term objectives, and higher interest rates and the strong deposit franchises will benefit these banks in 2023“, they explain from Fitch.
Profitability improved substantially in 2022 and the rating agency expects further improvements as higher rates generate strong net interest incomeso the rating fundamentals of Spanish midsize banks should continue to be resistant in 2023.
The asset quality it also improved in 2022, and the average impaired loan ratio for these banks was, at the end of last year, at a record low of 2.1%.
However, “higher mortgage payments and inflationary pressures pose credit quality risksalthough within our evaluation of the quality of the banks’ assets”, they point out from Fitch.
STABLE FUNDING
The four banks have stable funding and liquidity profiles and for the rating agency show endurance in light of recent market developments affecting the banking sector.
Las debt securities portfolios de Abanca, Kutxabank, Unicaja and Ibercaja have low valuation risks, helped by their strong deposit franchises and well-managed interest rate risks.
On the other hand the repayment of central bank financingthe highest minimum requirements for own funds and admissible liabilities (MREL) related to financing costs and incremental transfer rates to customer deposits will negatively affect the bank financing costs.
Although from Fitch they estimate that “the financing profiles of the banks will continue to benefit from large and granular deposit bases and limited commercial financing needs, since Loan growth will be moderate“.
In this sense, the agency qualifies the business profiles of the four banks with ‘bbb’ as a reflection of their strong regional franchises and with a market share of more than 20% of loans and deposits in their territories of origin.
“Bank business models are largely focused on retail loans. The business profiles of Kutxabank and Ibercaja are more diversified than its peers due to its larger wealth management and insurance businesses. This results in a higher contribution of fee income to operating incomea characteristic that has supported its profits with low interest rates,” they point out from Fitch.
Furthermore, the strategies of the four banks remain consistent with their business models and are focused on improve profitability.
“Asset quality targets will be more challenging in the current scenario, and portfolio sales in the case of Unicaja will be important to meet its 2% non-performing loan target by the end of 2024,” they add.
CREDIT RISK
Kutxabank, Unicaja, Abanca and Ibercaja are focused on retail home loansTherefore, credit risk is the main source that can affect these banks.
For this reason, from Fitch they foresee fairly stable loan volumes in 2023“as loan repayments may continue and household demand for credit will weaken given the inflationary environment, rising borrowing costs and a less dynamic housing market.”
the profile of Kutxabank moderate risk (‘bbb+’) benefits from a strong regional franchise and business focus “in retail mortgage lending in the Basque Country (A/Stable), a region with structurally better economic fundamentals than the Spanish average,” they say in Fitch.
The risk profile of Unicaja and Ibercaja of ‘bbb’ evidences a large share of retail mortgage lending, but also weaker asset quality performance over the cycle.
“A longer track record, even in periods of less benign economic conditions, could trigger a upward revision of the valuation”, they say from the agency.
The rating of bank is one notch lower at ‘bbb-‘ to express the bank’s “opportunistic” stance towards the inorganic growth through complementary acquisitionswhich has put some pressure on capital and added execution risks.
“The latter has been well managed as the acquisitions have been sequential and manageable in size, giving the bank time to absorb the shocks. If capital levels are restored to target levels and become less volatile, Abanca’s risk profile assessment could be revised upward“, they add.
With respect to bank resultsit is estimated that operating profit will increase further in 2023driven by a strong growth in net interest income (NII)which is a key revenue driver for entities, as margins continue to expand.
“The benefits of higher interest rates will more than offset inflationary pressures, moderate increases in loan impairment charges and the recently passed bank levy. It is likely that pass-through rates to deposits increase in the second half of 2023but they should not reach their terminal level until 2024,” they conclude in Fitch.
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