Spanish Banks: COVID-19 Changes Everything - Elena Iparraguirre Miriam Fernández Lucía González Antonio Rizzo Marta Heras - S&P Global
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Spanish Banks: Elena Iparraguirre
Miriam Fernández
COVID-19 Changes Everything Lucía González
Antonio Rizzo
Marta Heras
July 24, 2020
Updated Expectations
– We expect the Spanish economy will only recover to pre-COVID-19 crisis levels in 2022, while a
second wave of contagion or policy mistakes could lead to more severe contraction this year or a
softer longer rebound.
– The outlook bias on Spanish banks has turned negative.
– We now expect credit costs will increase to 80-100 bps of average loans in 2020--more than
double our previous estimate of 35 bps--and remain at similar levels in 2021.
– We forecast NPAs will peak at around 9.5% in 2021, and we expect some longer delays in divesting
the stock of legacy problematic assets from the previous downturn.
– Banks face tougher profitability challenges, with bottom-line results likely to halve this year,
reinforcing the rationale for consolidation, particularly among midsize players.
– Capitalization should hold up well for most banks, but some have limited buffers to absorb a more
negative shock than we currently forecast.
– Banks will make ample use of ECB funding facilities, and will continue building bail-in-able
cushions, but at a likely slower pace.
2
Banks' Outlook Bias Turned Negative…
Amid COVID-19, We Affirmed All Spanish Bank Ratings In April Majority Of Banks Now Carry Negative
Outlooks
Issuer credit rating Outlook Spain sovereign rating
AA-
Stable
A+ N
38%
A N N
A- S S N Negative
62%
BBB+ S S S N
BBB
BBB- N N
BB+
BB
BB- Rating Actions In April 2020
B+ – All ratings affirmed.
B – Outlooks on five banks revised to negative
B- N from stable.
CCC+ – Outlook on one bank revised to stable from
CCC positive.
– Existing negative outlooks on another three
institutions maintained at negative.
– Four banks kept stable outlooks.
We lowered the rating on Mulhacen to 'CCC+' with a negative outlook on July 14, 2020. Chart data as of
July 24, 2020. S--Stable. N--Negative. Source: S&P Global Ratings.
3…As The Economic Shock Of The Pandemic
Became Clear
Our Latest Estimates Point To A 9.8% Decline In We Revised Our BICRA Economic Risk Trend To
GDP Followed By Only A Partial Recovery In 2021 Negative
Spain real GDP % Spain previous real GDP %
8%
6%
4%
2%
0%
(2%)
(4%)
(6%)
(8%)
(10%)
2014 2015 2016 2017 2018 2019 2020f 2021f 2022f
f--Forecast. Source: S&P Global Ratings. Data as of July 13, 2020. Source: S&P Global Ratings.
4Compared To The Previous Downturn…
The Private Sector Carries Far Less Debt Housing Prices Are Well Below The Peak
Spain public sector debt/GDP Housing transactions
Total housing Transactions(left
(Leftscale)
Axis)
Spain private sector debt/GDP Average price
Price new
Newhousing
Housing(right
(Rightscale)
Axis)
Thousand (12 months
250 1,200,000
1,200 2,200
€/meter squared
200 1,000,000
1,000 2,000
cumulative)
800,000
800 1,800
150
600,000
600 1,600
%
100 400
400,000 1,400
50 200,000
200 1,200
0 0 1,000
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020f
2021f
Source: S&P Global Ratings. 2022f Source: Ministerio de Transporte, Movilidad y Agenda Urbana.
Banks' Funding Profiles Are Balanced
2,000 Domestic corporate,
household,and
household and NPISH
1,500 loans loans
NPISH
Bil. €
1,000 Domestic corporate,
household,and
household and NPISH
500 deposits
NPISH deposits
0
Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
f--Forecast. NPISH--Nonprofit institutions serving households. Sources: S&P Global Ratings, Bank of Spain.
5Unprecedented Fiscal, Monetary, And Regulatory
Measures Will Help Contain The Damage
About 6% Of Household Exposures Currently The €100 Billion State Guarantee – Equivalent To
Benefit From Moratorium Schemes Almost One Fifth Of Corporate Loans At End-2019 –
Has Helped Maintain Banks' Credit Flow To Companies
100 100 Other
Government- 4.5 Not allocated
sponsored 2.5
Banks- 90 90 Agro
mortgages
sponsored
49% IT
schemes 80 25.0 80
State guaranteed loans (bil. €)
44% Transportation-
70 70 Textile
related
60 Food and
60
beverage
Total granted: €41.6 billion Tourism- Transportation
50 50
related
Consumer
40 40 goods
67.5 Durable goods
30 Corporates 30
Professional
20 20 services
Construction
Government-
10 SMEs and self- 10
sponsored Tourism
employed
consumer
0 0
lending
7% Total to be Amount granted
allocated (until June 30)
Source: Bank of Spain, Instituto de Credito Oficial, S&P Global Ratings.
6Provisions And Nonperforming Assets Will
Increase
– The short-term nature of the COVID-19 shock and the government and banks’ initiatives to support the private sector
will contain losses.
– But we see annual domestic credit losses more than doubling compared to our previous estimates, standing at 80-100
bps both in 2020 and 2021.
– NPAs will peak in 2021 at about 9.5%, and it will take longer to work out the legacy stock of NPAs left by previous
recession.
COVID-19 Brought To A Sudden Stop The Previous Spanish Banks Face The Shock With Legacy NPAs
Declining Trend Of Credit Losses And NPAs From Previous Recession In Their Books
Credit losses as a % of average loans (left scale) Estate assets
Real estate Assets (left
(leftscale)
scale)
Previous expected credit losses (left scale)
Non Performingloans
Nonperforming Loans(left
(leftscale)
scale)
NPA ratio (right scale)
Previous expected NPA ratio (right scale) Coverage (right scale)
10% 20% 12% 70%
10% 60%
8%
15% 50%
8%
6% 40%
10% 6%
4% 30%
4%
5% 20%
2% 2% 10%
0% 0% 0% 0%
f--Forecast. NPA--Nonperforming asset. Sources: S&P Global Ratings, Bank of Spain. Data as a percentage of domestic gross loans. Data as of
end-2019. Source: Banks' financial statements.
7Credit Costs Lower For Banks With Larger
Mortgage Books
We Meaningfully Revised Our Credit Loss Banks With Larger SME And Consumer Exposure
Expectations For This Year And The Next Are More Prone To Asset Quality Erosion
2020-2021 credit losses pre-COVID-19 Mortgages Corporate
Corporate lending
Lending SME Lending
lending
2020-2021 credit losses COVID-19 impact Real
RE & estate and
Developers Other Retail
developers
Caja Laboral Kutxabank
Kutxabank Laboral
Abanca Ibercaja
Ibercaja Bankia
Bankinter Abanca
Bankia
Caixabank
Caixabank
Bankinter
Sabadell
BBVA
SCF
Sabadell
Santander
Santander
BBVA
0% 20% 40% 60% 80% 100%
0 50 100 150 200 250 300 350
Domestic
DomesticLoan
loanBook
book
Cumulative CoR (bps)
bp--Basis point. CoR--Cost of risk. Sources: S&P Global Ratings, banks' SME--Small and midsize enterprise. Data as of end-2019. Source: Banks'
financial statements. financial statements.
8Higher Credit Losses And Earnings Pressure Will
Weaken Already Modest Profitability Prospects…
Spanish Banks' RoE Will Decline Significantly In 2020, Improving Only Slightly In 2021
2019 2020f 2021f
14%
12%
10%
8%
RoE
6%
4%
2%
0%
Bankinter SCF Caixabank BBVA Laboral Santander Cecabank Kutxabank Sabadell Abanca Ibercaja Bankia*
*Data for BFA Bankia before minorities. f--Forecast. RoE--Return on equity. Sources: S&P Global Ratings, banks' financial statements.
9…Strengthening The Case For Further
Consolidation And Depressing Equity Valuations
Midsize And Smaller Players Will Likely Face Poor Earnings Prospects Have Driven Down
More Profitability And Tech Disruption Challenges Equity Valuations
Domestic assets Bankinter Santander BBVA
Sabadell Bankia Caixabank
1.4x
Laboral
Liberbank 1.2x
Ibercaja
Unicaja 1.0x
Abanca
0.8x
Kutxabank
Bankinter
0.6x
Sabadell
Bankia 0.4x
Santander
Caixabank 0.2x
BBVA
0.0x
0 100 200 300 400
Bil. €
Source: Banks' financial statements as of end-2019. Source: Capital IQ.
10Capital Will Hold Up, But Some Banks Have More
Limited Buffers Against A Harsher Scenario
2019
2020f
Strong
(10%-15%) 2021f
S&P Global Ratings RAC ratio (%)
Adequate
(7%-10%)
Moderate
(5%-7%)
Weak
(3%-5%)
Very Weak
(0%-3%)
Arrows signify buffer. Pink arrows signify limited buffer. f--Forecast. RAC--Risk-adjusted capital. Source: S&P Global Ratings.
11Revised TLTRO III Is An Attractive Funding Option
For Banks But It Could Reinforce The Sovereign-
Bank Nexus
Banks Largely Borrowed The Maximum ECB Long- Some Of These Funds Will Likely Be Channeled To
Term Funding Allowed Build Government Bond Portfolios
TLTRO-III take up
300
Santander
Caixabank 250
Government bond holdings (bil. €)
BBVA
Sabadell 200
Bankia
150
Bankinter
Abanca 100
Kutxabank
50
Ibercaja
Laboral
0
0 20 40 60 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Bil. €
ECB--European Central Bank. TLTRO--Targeted longer-term refinancing Source: Bank of Spain.
operations. Source: S&P Global Ratings.
12MREL Buildup Will Continue, But At A Slower Pace
– Absent urgent regulatory need, bailinable debt issuance to fill gaps or improve the subordinated MREL components,
will likely slow.
– No ratings on the five banks with a defined bail-in resolution strategy currently benefit from ALAC uplift, although
some are closer to the thresholds than a year ago.
– For other banks with sale-of-business resolution strategies, ALAC uplift would be contingent on assurance that all
senior creditors would be treated similarly in resolution.
Most Banks Are Already Compliant Or Close To ALAC Buffers Are Getting Closer To The Required
Complying With MREL Thresholds
MREL built MREL requirement 2020f 2021f 2022f
Threshold for one notch of uplift
5%
Bankinter
Kutxabank Threshold Santander and BBVA
4%
Abanca
ALAC buffer/RWAs
Ibercaja 3%
Caixabank
Sabadell 2%
Bankia
BBVA 1%
Santander*
0%
0% 5% 10% 15% 20% 25% 30% BBVA Santander Sabadell Bankia Caixabank
MREL/RWAs
*S&P Global Ratings estimate. Data for MREL buildup as of Q1 2020 except for ALAC--Additional loss-absorbing capacity. f--Forecast. Sources: S&P Global
Ibercaja (Q4 2020). MREL--Minimum requirement for own funds and eligible Ratings, Bank of Spain.
liabilities. RWA--Risk-weighted asset. Source: S&P Global Ratings, banks'
financials.
13Related Research
– Global Banks Outlook Midyear 2020: Temporary Shock, Profound Implications, July 9, 2020
– The $2 Trillion Question: What's On The Horizon For Bank Credit Losses, July 9, 2020
– ECB Set To Ease Regulatory Hurdles To Eurozone Bank Consolidation, July 3, 2020
– Asset Quality Not ECB Liquidity Will Determine Eurozone Banks' Fates, July 2, 2020
– Banking Industry Country Risk Assessment: Spain, June 18, 2020
– How COVID-19 Is Affecting Bank Ratings: June Update, June 11, 2020
– The Seven Key Questions We Ask About Eurozone Government Debt Profiles, May 21, 2020
– Spain, May 20, 2020
– Government Job Support Will Stem European Housing Market Price Falls, May 15, 2020
– Outlook Revised To Negative On Several Spanish Banks On Deepening COVID-19 Downside Risks, April
29, 2020
– Spanish Banks Are At A Crossroads, March 6, 2020
– Tech Disruption In Retail Banking: Spanish Banks Have Time to Adapt, But Risk Falling Flat, Feb. 17,
2020
– Contingency Risk From IRPH-Linked Mortgage Litigation Claims Is Reducing for Spanish Banks, Sept.
19, 2019
14Analytical Contacts
Elena Iparraguirre Miriam Fernández Lucía González
Director – Lead Analyst Spain & Portugal Associate Associate Director
elena.iparraguirre@spglobal.com miriam.fernandez@spglobal.com lucia.gonzalez@spglobal.com
+34-91-389-6963 +34-91-788-7232 +91-788-7219
Antonio Rizzo Marta Heras
Associate Director Rating Analyst
antonio.rizzo@spglobal.com marta.heras@spglobal.com
+91-788-7205 +91-389-6967
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