S&P Upbeat on Spanish Banks

S&P Upbeat on Spanish Banks

S&P Upbeat on Spanish Banks

Spanish banks are on course to consolidate in 2015 the improvement in earnings seen last year, according to Standard and Poor (S&P).

As the country continues its economic recovery, lenders’ bad debts will decline and profitability will improve, the ratings agency said in a report published in February.

Spain’s biggest bank Santander’s fourth quarter earnings supported S&P’s view. The lender posted a 69 percent increase in profit as provisions for bad loans fell nearly 12 percent.

S&P expects the country’s banks to post recurrent pre-tax profit of about 14 billion euros in 2015, up 25-30 percent from a year earlier and the outlook for 2016 is even rosier, with earnings forecast to rise to over 20 billion euros, the agency said.

The banks’ lower risk profile and the decline in provisioning for toxic property assets will bolster results.

SECTOR RESTRUCTURING PAYS OFF

After Spain’s property market collapsed in 2008, its banks were saddled with a slew of soured loans issued to property developers during a decade-long boom.

The lenders’ capital base was gradually eroded by hefty provisioning for these debts, forcing them to turn off the credit tap. From 2008 to June 2014, the banks took almost 280 billion euro in charges to increase provisions, according to Bank of Spain figures.

Despite implementing an in-depth restructuring of the sector – including a raft of mergers – in 2012 the government had to seek a European Union bailout to the tune of 41 billion euro to clean up and recapitalise the banks. That industry overhaul is now bearing fruit as Spain exited the EU bailout programme in January 2014.

In October of that year, its banks sailed through the European Central Bank’s stress tests, with healthy balance sheets and solid solvency ratios. S&P noted that the banks’ reinforced capital cushions should lead to an improved dividend policy in the coming years.

CREDIT REVIVAL MAY TAKE TIME

While Spain’s biggest banks Santander and BBVA have both committed to increasing lending in their home market in 2015, most analysts expect the revival in credit activity to be a slow process.

There are, however, already some signs of a recovery as property prices bottom out and mortgage lending begins to pick up, albeit slightly. Corporate lending is also forecast to improve over the next couple of years.

So is it all good news for Spain’s banks? Despite its upbeat report, S&P flagged that the sector could be negatively affected if the economic recovery is not sustainable. That said, on Thursday, the Bank of Spain raised its GDP forecast for 2015 to 2.8 percent from a previous 2.0 percent, citing amongst other factors the improvement in financing conditions after the expansion of the ECB’s bond programme,

For information on investment in Spain, contact corporate law firm Argali Abogados.

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