DBRS Morningstar: Spanish Banks: COVID Crisis Starts to Impact H1 Asset Quality; Earnings Pressured

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.

Key highlights from DBRS Morningstar’s commentary on the banks’ results:

• Spanish banks’ net interest income was hit by lower overdraft charges and lower loan and fixed-income yields, despite higher volumes.
• Asset quality is also showing some signs of deterioration, although it is still too early to see a clear impact from the crisis.
• Large Spanish banks have reported strong balance sheet performance during H1 2020 with strong credit and deposit growth during the first 2 quarters of 2020.

“Overall we are beginning to see, albeit slowly, the first signs of credit quality deterioration with either an increase in Stage 2 loans or NPLs. DBRS Morningstar considers that in coming quarters we will see a much more significant increase in both. The slow pace of deterioration in credit quality, despite the significant economic shock, can largely be explained by the extraordinary measures applied by governments and banks to support the economy” said Pablo Manzano, Vice President from the DBRS Morningstar Financial Institutions team.

The commentary focuses on the H1 2020 results for the largest Spanish banks. The full commentary “Spanish Banks: COVID-19 Crisis Starts to Impact H1 2020 Asset Quality; Earnings Under Pressure” is available at www.dbrsmorningstar.com.