Spanish Banks: COVID-19 Crisis Starts to Impact H1 2020 Asset Quality; Earnings Under Pressure

Large Spanish banks have reported weaker earnings in Q2 2020 as they booked further Loan Loss Provisions due to the COVID-19 crisis, whilst core revenues are also being pressured. The banks' asset quality is starting to show some signs of deterioration in the form of higher Stage 2 loans and Non-Performing Loans (NPLs) at some banks, although the loan moratoria and state guaranteed loans continue to protect asset quality for the time being. Capital ratios were up QoQ, driven by positive mark to market, and lower RWAs due to regulatory changes and the use of the state guaranteed loans scheme. Nevertheless, DBRS Morningstar expects capital ratios will be pressured in coming quarters, in line with the conclusions from the recent vulnerability assessment of the ECB. Despite the challenging environment, Spanish banks are continuing to grow their lending books, and this will have a positive effect over the long-term for the Spanish economy.