Amid the persistent low-rate environment, Spanish banks have boosted fee income and cut costs to alleviate pressure on interest income.
Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, CaixaBank SA and Banco de Sabadell SA, along with banks across the world, have been contending with low interest rates on the money they lend out, meaning net interest income, or NII — the difference between income earned on loans and interest paid on deposits — has declined over recent years.
CaixaBank, when discounting the contribution of recently acquired Bankia, reported a year-over-year fall in NII in the second quarter and said it could miss its core revenue guidance due to the pressure on NII. It expects the number to bottom out in the next quarter.
BBVA also saw a drop. CEO Onur Genҫ said it expects Spanish NII to fall by between 1% and 2% for the 2021 financial year.
Sabadell reported a year-over-year rise in NII, partly due to the ECB's cheap money targeted long-term refinancing operations; Santander also saw a yearly increase, but both are fighting against long-term trends.
No imminent interest rate rise
The ECB has said that it will not increase interest rates until it sees inflation in a healthy place. The European Banking Authority, in its recent stress test, projected that Santander, BBVA and Sabadell would record a decline in NII, or at best anemic growth, between 2021 and 2023 in both its baseline and adverse economic scenarios.
As they contend with NII pressure, the Spanish banks have increased fee income. Santander's net fee income rose to €2.62 billion in the second quarter, from €2.28 billion a year ago — an increase of 14.9%. BBVA's net fees and commissions increased by 26.3%, while Sabadell reported a 13.6% rise and CaixaBank saw a pro forma 9.5% increase.
"What we are doing on fees is quite remarkable," CaixaBank CEO Gonzalo Gortázar said on a second-quarter conference call. "We are quite comfortable with the way the business is going and the capacity we have over time to more than offset the pressure on NII with the rest of the income statement."
Santander and BBVA, which have a strong presence in Latin America, would see a higher fee income from those businesses, as they typically have a greater portion of fee income coming through, especially on the credit card side, compared with European banks, according to Johann Scholtz, a banking equity analyst at Morningstar.
"Increasing fee income is a priority for them, [as it is for] all European banks," Scholtz told S&P Global Market Intelligence.
Additionally, the banks have been focusing on cost efficiency to tackle income pressure. All four have reached agreements with trade unions on large-scale job cuts, and, according to Reuters, Sabadell has kicked off a new round of layoffs. The Spanish banking industry as a whole cut 4% of its jobs and closed 10% of its branches in the first half of 2021.
While banks are focused on downsizing branch networks and staff to save costs, as well as on boosting fee income, it will take some time to see tangible results, Elena Iparraguirre, primary credit analyst at S&P Global Ratings, wrote in a July 22 report.
Next Generation fund
Even when rates do rise, which would help boost banks' net interest margins, they could also create repayment problems for some borrowers, Sam Theodore, an independent analyst, told Market Intelligence.
But banks in Spain could receive a boost from the EU's €750 billion Next Generation fund, a stimulus program set up to help member state economies recover from the COVID-19 pandemic. Sabadell said it could see a €12 billion boost to business lending between 2021 and 2026 due to the fund.
The fund will be a net positive for the banks, and the support offered by the ECB to the lenders will not disappear in the foreseeable future, Theodore said.