Skip to content
Search

July 2023 / INVESTMENT INSIGHTS

From Crisis to Confidence: Spanish Banks Ready to Shine

Lessons from the Global Financial Crisis have left a stronger banking sector in Europe, where Spain serves as a prime example

If we thought turmoil in the financial sector, as well as troubled banks, was no longer a concern, then we were in for a rude awakening earlier this year. Regional banks in the US, along with the Swiss giant Credit Suisse, encountered difficulties. Thankfully, swift actions taken by central banks and politicians prevented these issues from spreading to major banks in the US and across Europe. 

This can be partly attributed to the lessons learned from the Global Financial Crisis, which severely impacted banks in Europe. Presently, the banking sector is resilient, benefiting from two driving factors: regulation and market consolidation. 

Regulatory reforms at the European level, notably Basel III, have played a crucial role in enhancing the financial stability of European banks. These reforms served to mitigate risks for the banking sector, otherwise prevalent in previous economic cycles. 

One of the countries this is evident within, is Spain. When looking at Spanish banking sector under a microscope, we see the qualities of a more stable banking sector. 

Consolidation as a key factor 

Highly concentrated banking markets with strong market structures tend to exhibit greater stability and have more profitable institutions. Spain serves as an example of successful market consolidation following the Global Financial Crisis.  

The Spanish banking sector underwent significant restructuring, transforming from a highly fragmented market to one in which five banks today control 67% of the retail lending market and over 80% of the deposit market. 

Since 2008, the number of credit institutions in Spain has halved, indicating a substantial market consolidation, only being surpassed by the Netherlands and Cyprus which are two countries with the highest degree of consolidation in Europe.  

Risk profile  

The level of risk banks have on their balance sheets plays a pivotal role in determining their resilience during economic cycles. In Spain, the banking sector was greatly exposed to real estate lending and developers leading up to the Global Financial Crisis and leverage in Spain reached 170% of GDP. This was significantly higher than the Euro area average of a little over 100%. 

Since then, Spain has reduced its debt. Currently, the level of debt in Spain is 93% of GDP and in line with the average for other European countries. Compared to Sweden, the United Kingdom, and France, we can see that Spain’s current leverage level is significantly lower. In Sweden, leverage is 203% of GDP, while UK is leveraged 148% of GDP, and France is at 124% of GDP.  

Improved financial flexibility 

Financial flexibility is not solely determined by the risks a bank takes, but also by whether it receives fair compensation for those risks and possesses the earning power to withstand losses through credit cycles. 

The financial flexibility of a banking sector can be measured through revenue strength, cost efficiency and absorption of credit risks. In this regard, Spain’s banking sector demonstrate positive performance. 

Spanish banks are highly geared towards the rising interest rates with 70% of the housing stock priced on a variable rate basis. This has improved Spanish bank revenues positively, as the interest rates have climbed upwards and will continue to do so. Another positive development is loan to deposit ratios, which are down from 120% in 2010, to current 94%, allowing for more flexibility on the pass through of funding costs. 

Compared to core European countries, the cost structures of Spanish banks have remained stable, with an average efficiency ratio of 51% compared to 69% for French banks, 74% for German banks, and 48% for Sweden, which are leaders in this respect. 

Strong cost efficiency and revenue strength enhance the capacity to absorb increased risks. Spanish banks also perform well compared to other core European countries in pre-provision capital generation which is currently 3.38%, compared to 2.4% in France and closely approaching Sweden's 3.5%. 

Spain shows the path to financial stability 

The recent challenges faced by regional banks in the US and Credit Suisse remind us of the importance of a stable financial sector. Fortunately, lessons from the Global Financial Crisis have left a stronger banking sector in Europe where Spain serves as a prime example. 

The positive development in Spain is driven by consolidation and efforts to reduce debt levels and improved financial flexibility. This has positioned Spanish banks more favorably compared to their European counterparts. Spanish banks rightfully deserve recognition for their accomplishments. 

IMPORTANT INFORMATION

This material is being furnished for general informational and/or marketing purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, nor is it intended to serve as the primary basis for an investment decision. Prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources’ accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request. It is not intended for distribution to retail investors in any jurisdiction.

Previous Article

July 2023 / INVESTMENT INSIGHTS

There are Reasons to Like European Bank Bonds
Next Article

July 2023 / INVESTMENT INSIGHTS

A New Fixed Income Regime—Three Active Portfolio Responses
202307-3009404

June 2023 / INVESTMENT INSIGHTS

Global drivers create opportunities in Central and Eastern Europe

Global drivers create opportunities in Central and Eastern Europe

Global drivers create opportunities in Central...

After years of investing in production in the Far East, complex and high value-added...

By Peter Botoucharov

Peter Botoucharov Emerging Market Credit Analyst