Spanish banks face fee income headwinds after long run of growth

The strong growth in fee and commission income that helped Spanish banks weather a prolonged period of low interest rates in recent years looks set to end.

Reduced income from asset management fees amid a slide in markets and a slump in corporates fees due to a slowing economy are among the headwinds facing what has become an increasingly key source of income for the banks.

Spanish lenders in recent years found ways to boost fee and commission income to offset a slump in net interest income, or NII, caused by negative rates in the eurozone. This type of income, as a percentage of total income, rose steadily at Spain's six largest banks over the last decade to 34.5% in 2021 from 22.7% in 2012, outpacing growth at Europe's 50 largest banks, S&P Global Market Intelligence data shows.

NII is the difference between revenues generated from a bank's assets and the expenses associated with paying on its interest-bearing liabilities.

"There are headwinds to fee and commission income performance," Benjie Creelan-Sandford, bank equity analyst at Jefferies, said in an interview. "Spanish banks' asset management businesses have been a key source of momentum for fee growth in recent quarters, but with the market backdrop becoming tougher, the extent of that momentum may slow."

Market slump

Global stock and bond markets have sold off since the beginning of the year amid surging inflation and fears about the impact of rising interest rates on global growth. The slump in markets will have depleted assets under management for the banks, discouraged new inflows into their funds and made clients more inclined to opt for lower-risk products. This all reduces fee income, Creelan-Sandford said.

A slowdown in economic activity in the near term due to stubbornly high inflation and supply chain issues, exacerbated by the war in Ukraine, may also create some risk to fee growth from corporates for Spanish banks, Creelan-Sandford said.

Spain's economy is expected to grow 4.0% in 2022, revised down from 5.6% in February, according to a European Commission forecast in May. The same forecast also revised growth in the European Union for 2022 to 2.7% from 4.0% in February.

Risks to Spain's growth forecasts are "firmly skewed on the downside, and inflation forecasts [are] firmly skewed on the upside," according to a June 10 rating action commentary by Fitch Ratings on Spanish sovereign debt.

Spanish banks boosted fee income in recent years by charging customers for services that were previously free. CaixaBank SA last year began to charge customers who use services at branches that they could access online. Earlier in 2021, Banco Bilbao Vizcaya Argentaria SA became the first Spanish bank to charge a fee for deposits as customers with savings above €100,000 were hit with a monthly commission of 0.025% or an annual commission of 0.3%.

Customer squeeze

Opportunities for Spanish banks to squeeze more fee income from customers are limited, said Pablo Manzano, deputy vice president of global financial institutions at credit rating agency DBRS Morningstar.

"Over the last few years, Spanish banks have implemented a new pricing structure for current accounts, transfers and other services," Manzano said. "This approach was finalized during the [COVID-19] pandemic, so they might not be able to increase prices any further."

Some of the fees Spanish banks introduced in recent years, such as charges on certain types of deposits, may no longer be applicable as interest rates rise.

"Some banks have effectively passed on the impact of negative rates by introducing charges for corporate and institutional deposits," said Creelan-Sandford. "Those charges should drop out as rates increase, so that could also be a bit of a drag on the momentum over the next few quarters."

CaixaBank declined to comment. Banco Santander SA, BBVA, Banco de Sabadell SA, Unicaja Banco SA and Bankinter SA did not respond to a request for comment.

Fee and commission income at Spain's largest banks enjoyed a relatively strong first quarter after a record performance for many of the lenders in the final three months of 2021. Comments about future prospects by the banks' management teams during first-quarter earnings calls ranged from bullishness at Unicaja Banco to caution at BBVA and Bankinter about the impact of market turmoil on asset management fees. BBVA and Banco de Sabadell said their fee income from asset management had been dented by market volatility in the first quarter.

Tourist boost

Hopes for continued growth in fee and commission income in 2022 should come from the unrestricted return of tourists to Spain after two severely interrupted years due to the COVID-19 pandemic, said Creelan-Sandford. Given Spain's popularity as a holiday destination, banks are well set to boost fee income from tourism-related business activity as well as fees from ATMs and through credit card usage.

Relatively high levels of savings that remain in Spanish banks following the pandemic, along with concerns from customers about the impact of high inflation on the real value of those deposits, may also support growth.

"Banks that can offer investment products that beat inflation are a little bit more advantaged in that situation," said Chiara Romano, associate director of financial institutions at Scope Ratings.

Whatever happens in the short term, fee and commission growth for Spanish banks should still have some way to run in the coming years due to the relative youth of Spain's asset management industry, according to CaixaBank CFO Javier Pano. "There is plenty to do," said Pano during a first-quarter earnings call. "Spain is still behind on this business compared to other countries in Europe."

Still, the challenges that have emerged in 2022 means it is unlikely to be one of the better years for fees and commissions at Spanish banks.

"Fees aren't going to go down," said Manzano. "But it's true that the positive dynamic that we've seen in recent years is going to be less positive."