Thursday, July 29

Cuts in staff and office expenses do not remove Spanish banks from the solvency queue in Europe


“Spain has excess capacity.” This phrase has been repeated to exhaustion in the banking sector, both among the entities themselves and among supervisors. Translated, it means that the templates and the number of offices should be reduced. The ultimate goal, as noted, is to improve profitability and bank solvency. The Spanish banking industry has spearheaded office closures and layoffs in Europe in recent years. However, this reality has not allowed it to get out of the tail of the continent in terms of solvency levels.

The layoffs leave Spain as the country in Europe with the fewest workers for each bank branch

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Year after year, the different reports made by both the European Banking Authority (EBA, in its acronym in English) and the European Central Bank (ECB) point out Spain as the country with the lowest solvency banking sector and one of those that they have the lowest level of profitability. In the year of the pandemic, despite improved solvency data for Spanish banks, the body chaired by Christine Lagarde once again placed Spain at the bottom of the list.



The Spanish banking system is in a much more favorable situation than it had in the previous crisis and the solvency data is at levels that have not raised, for now, the alerts of the supervisors. Successive stress tests carried out both at European and national levels have shown the endurance capacity of these banks, although it is a pending task for the sector to improve this situation, since no other country on the continent is surpassed by the financial industry Spanish. In this sense, it is where cost cutting through the reduction of staff and branch networks has taken a lot of prominence.

Supervisors have repeatedly remarked that, faced with a problem that affects both the solvency and profitability of the business, banks must undertake these cuts. The last of the times was last month, in a forum in which the Bank of Spain and the European Central Bank agreed in the analysis. The vice president of the community body, Luis de Guindos, defended that it is a mechanism of “defensive nature.” “If there is no improvement in profitability, there will be a solvency crisis,” he added. “The sector has a problem of overcapacity and profitability, and this can cause a problem of financial stability,” agreed the governor of the Bank of Spain, Pablo Hernández de Cos.

However, the strong spending cuts made by Spanish banks over the last decade, although they have improved the solvency data of the sector, have not prevented the European tail from being followed. This is shown by the different transparency reports that the EBA has produced annually since 2015 and that allow comparing Spanish banks with other European banks in different metrics, including solvency. As a technical note, a quantity known as the CET1 Fully Loaded ratio is usually taken as a reference, which measures the bank’s capital against its risk-weighted assets.

In the first of those reports, Spain appeared in the fifteenth position, half a point below the community average. The following year, Spain fell on the list and only surpassed Portugal and Latvia, with a ratio of 10.8%, compared to 13.5% of the European average. In 2017, the solvency ratio stood at 10.5% and Spanish banks were already in the last position. During the following three years, the Spanish sector has been improving its data, reaching 11.8% in the last year. Of course, three points behind the European average, according to the statistics published by the European banking regulator. In other words, although Spain has increased its solvency levels, it has done so at the same rate as Europe.

The EBA study includes in the report the twelve largest banks in Spain, including the eight listed (Santander, BBVA, Bankinter, Bankia, CaixaBank, Sabadell, Liberbank and Unicaja) and four others (Kutxabank, Ibercaja, Abanca and Cajamar); that cover practically the entire Spanish financial sector. Despite this, none of the Spanish banks included in the report was among the 50 with the highest levels of solvency in Europe, with the union of the former Basque savings banks being the one at the highest level and BBVA, at the lowest .



Since 2015, when the EBA turned its transparency tests into a continuous six-month exercise, and until the end of 2020 in Spain, 25,124 jobs have disappeared in the banking sector. Before that year and since the beginning of the financial crisis, 75,000 had already disappeared and this year at least 15,400 layoffs will be added. Only Germany is above the Spanish records. Despite this, Spanish banks, although their average solvency level has improved by a little more than one point, remains in the tail of Europe.

At the same time, between 2015 and 2020, almost 8,700 bank branches were closed in Spain. Again, only Germany has closed more offices in the same period. Since 2008, Spanish banks have cut their network the most, making half of their stores disappear. This course will add at least 3,200 new closings. Spanish banks will spend more than 4,100 million in layoffs and office closures between the end of 2021 and the first half of this year.



Four of the main Spanish banks (BBVA, Santander, Sabadell and Bankinter) are among the 38 European entities that expect to know on July 30 the results of the famous stress tests carried out by the EBA every two years and that, on the occasion of the pandemic, they were postponed last year. These tests try to measure the resistance of banks to different economic scenarios. On this occasion, for example, its capacity will be analyzed in the face of a hypothesis in which the economic situation caused by the coronavirus extends more than expected. CaixaBank does not enter this examination as this year it has been focused on the absorption of Bankia.

Spanish banks easily passed the last test, carried out in 2018. On that occasion BBVA, Santander, CaixaBank and Sabadell participated, the latter being the one that obtained the worst score in the case of the most adverse scenario. Although all of them obtained ratings above the minimum, the truth is that, once again, the Spanish average was below the average solvency in Europe, both in the worst and most positive scenarios.

Solvency is not the only pending task for Spanish banks. In a recent ECB report, it was listed as the third country in the queue for return on capital (RoE), as the profitability of financial institutions is measured. Only Ireland and Greece had financial sectors with lower profitability in 2020 than in Spain. Specifically, the data for the course of the pandemic in Spain was -3.6%, compared to an average of 1.9% of the European average. In this case, the data is affected by the coronavirus and the provisions that the banks had to undertake. Before the pandemic, the profitability of Spanish banks had been above average.



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