Commentary

Spanish Banks' Profitability to Benefit from Higher Interest Rates

Banking Organizations

Summary

DBRS Morningstar released a commentary on Spanish Bank’s 2022 results. Summary highlights from the commentary include:
• Large Spanish banks posted a domestic aggregated profit of EUR 7.7 billion in 2022—a significant increase from EUR 4.0 billion in 2021—with all banks reporting annual growth. The solid performance is explained mainly by lower cost of risk (CoR), contained operating costs, and higher net interest income (NII).

• The increased in NII among all banks was significant. The repricing of banks' loan books, coupled with a limited rise in deposit costs, contributed to the bulk of the NII increase. Some banks are also benefitting from a large fixed-income portfolio.

• Spanish banks are well positioned to continue to benefit from higher rates in 2023 as the full repricing of their loan books is still underway. This is borne out in the evolution of the 12-month Euribor rate, which increased by 381 basis points (bps) during 2022, whereas the average loan yield for Spanish banks increased by just 63 bps in the same period.

• For 2023 new business volumes will likely reduce, given that supply and demand factors are adversely affecting new credit production, although we do not expect a collapse of new credit in Spain. Other potential risks for Spanish banks include the evolution of their cost of risk (CoR), which we expect to deteriorate during 2023, as well as the evolution of deposits costs.

“DBRS Morningstar considers that Spanish banks' profitability will further benefit from higher interest rates in 2023 as the full repricing of their loan books is still underway”said Pablo Manzano, Vice President from the DBRS Morningstar Global Financial Group team. “For 2023, key areas for monitoring include the degree of the reduction of new business volumes, the deterioration cost of risk and the increase of the deposit costs ”.