Spain's largest lenders — Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA — will be better protected from negative interest rates because of their presence in faster-growing emerging markets, while smaller more domestically focused lenders such as Bankia SA may have to rethink their business models, according to analysts.
However, no Spanish lender will be immune from the effects of low interest rates over the long term as the intensive restructuring undertaken by the sector will curb its ability to cut costs, and a slowing economy is dampening credit demand, experts say.
European banks across the board have suffered as low interest rates eat into margins, a situation exacerbated by the European Central Bank's decision to cut rates further into negative territory in September.
The 12-month average monthly Euribor rate, the benchmark lending rate for many European lenders, was a negative 0.304% in October compared to a negative 0.154% in October 2018.
Santander derives most of its profits from North and South America, while BBVA owns Mexico's leading bank and has operations in Turkey. Both banks suffered a fall in net interest income and net profit in Spain in the first nine months of the year, and Pablo Manzano, an analyst at DBRS Morningstar, said they have taken a more cautious approach to lending than some of their domestic peers.
"If we include the international operations, the picture changes: Net interest income is still growing at about 4% year over year. The international diversification of these banks is very positive," he said.
Although interest rates have also declined in their overseas markets, they remain much higher than in Europe and can protect those economies by boosting lending, he said.
According to S&P Global Market Intelligence data, Santander's net interest income in the first half of 2019 was up 4.16% compared to the first half of 2018, and BBVA's rose 4.66%. Midsize domestic Spanish lender CaixaBank SA grew this line by only 1.88% in the same period while Banco de Sabadell SA and Bankia reported practically flat or lower growth.
The larger banks also outperform other lenders on net interest margin. BBVA's stood at 2.79% at the end of the first half of 2019, while Santander's was 2.55%, and at Sabadell, CaixaBank and Bankia, the margins were 1.76%, 1.63% and 1.08%, respectively.
This trend appears likely to continue. Although Spain is one of Europe's fastest-growing economies, it is showing signs of slowdown, which will further complicate matters for banks suffering from low interest rates.
"It is difficult to see that lending growth is going to be a great positive driver for Spanish banks in the next quarters or months so this creates another layer of complexity and difficulties for Spanish banks in improving profitability," Manzano said.
In the years following the financial crisis, Spanish banks went through a complete restructuring, radically cutting costs and selling off toxic real estate loans inherited from Spain's real estate boom and bust.
That limits the amount of cost cutting lenders can undertake, and those lenders who are able to mitigate the pressure on net interest income through fee-driven businesses will be in a better position to compete in a "lower for longer" interest rate environment, said Arnaud Journois, an analyst at DBRS Morningstar.
New business model
Javier Santacruz, an economist who researches the Spanish banking sector at the Instituto de Estudios Bursátiles, a Madrid business school, said lenders need to rethink the way they do business to remain profitable in a low interest rate world.
"The challenge now is to look for a new business model, with less weight from the net interest margin and more weight from gross margins for example fees and commissions from business banking, corporate operations, asset management or operations from financial advisory," he said.
Banks need to diversify from traditional banking operations, increase their geographic reach and start looking at new means of lending, for example in socially responsible projects, he said. Banks are under pressure to tackle climate change by reducing their lending to fossil fuels and increasing financing of renewable energies.
However, with negative interest rates set to stay for a while, there is very little Spanish lenders can practically do to offset the impact, some experts say, although their efforts in cleaning up their balance sheets will pay dividends.
"There is no way the banking sector can offset the negative interest rate scenario but in terms of strengthening the balance sheet, they are doing it rather admirably considering the disaster in earnings and net interest margins that negative interest rates entail," said Daniel Lacalle, chief investment officer at fund manager Tressis Gestión.
"There is no rising demand for credit, it is not just a question of supply; borrowers are unwilling to take massive risk[s] despite low interest rates," he said.