Losses suffered over the last seven quarters effectively wiped out half the profits that Spanish banks have accumulated over the last twenty years, according to a comprehensive report on the state of the Spanish financial sector, published by Exane BNP Paribas. The report says that Spanish banks are changing from high-risk, high-return investments into utility-type investments, but with the high risk still intact.

“The cumulative loss reported during the past seven quarters (more than €90 billion) has been as big as 49% of all the profits reported during the previous twenty years,” says Exane analyst Santiago Lopez Diaz. “Basically, half of the profits reported since 1992 have evaporated due to credit losses and other impairments.”

“The key problem is that the system is facing the biggest structural decline in profitability in living memory and one which is unlikely to be reversed any time soon,” he says.

Spanish Banks

Spanish banks’ negative loan growth will continue

Before the most recent crisis, Spain had an unbroken, fifty-year streak of positive nominal loan growth. Between 2000 and mid-2007 the total loan book in Spain multiplied by a factor 3.5, the kind of explosive growth more commonly seen in emerging markets than the EU. This loan growth began falling in 2007 and went negative for the first time in August 2009. “[Loan growth] has now remained in negative territory for the best part of four years and there are no signs of an imminent recovery,” says Diaz.

The concern is that Spain still has serious structural problems that need to be addressed including high unemployment, weak growth, and significant private sector debt. The report also argues that the mortgage market will need further adjustment before the economy can stabilize. This could cause the total loan book in Spain to decrease by a further €200 billion in the next three or four years, compared to the €344 billion that has been lost since 2007.

Assuming a long-term loan growth rate of 5 percent, the report finds that it will take Spain seven years after de-leveraging is complete to reach pre-crisis loan book levels, and it’s not clear when de-leveraging will finally end.

Spanish bank consolidation could create ‘semi-oligopoly’

The total number of major Spanish banking entities will fall from more than 50 in 2007 to around five in the next few years, the report predicts. On the one hand this will benefit the Spanish financial sector because each bank will have greater market share, even if the market itself is smaller. It will also give banks more control over pricing because of the ‘semi-oligopolistic’ nature of such a market, but that doesn’t mean that consolidations will be good for the Spanish economy as a whole.

First, banks that are ‘too big to fail’ have tacit permission to take outsized risks on the assumption that taxpayers will bail them out if necessary. In practical terms the bigger the banking institution the more likely the tax payer foots the bill in case something goes wrong,” says Diaz. Second, when banks have more pricing power they are able to increase their margins on the loan book, but that could simply decrease total demand for loans, slowing growth for the rest of the economy.