There were few surprises in the operating results of the leading Spanish banks. First-half earnings were generally weak, but excluding extraordinary items related to Covid-19 and other factors, they could have been worse. Credit provisions trebled from very low levels but most banks reported a positive bottom line and a couple pointed to a recovery in June.
All in all, cost-of-risk guidance for Spain looks manageable and will likely be absorbed out of ordinary profits. The bigger question mark is around 2021 asset-quality developments, since banks are not guiding here and there is little current visibility, given uncertainties about a second peak and the effects of new localized or regional lockdowns. Current guidance is, in fact, well below the cost of risk seen in the euro area debt crisis, when mandated real estate provisions forced most banks into net losses in 2012.
One key reason for the milder credit cycle this time around is the greater liquidity support to the entire system, starting with the banks. The authorities moved swiftly, allowing payment holidays, injecting liquidity and loosening supervisory constraints. The environment is very different from the last crisis, when austerity and deleveraging were the buzzwords. This time, authorities are encouraging banks to lend with the right incentives, something that just was not there in the previous cycle.
Of note, some of the international operations of Spain’s two multinational banks have become a source of risk in this crisis. BBVA and Santander have material exposures to the US, Brazil and Mexico, where the pandemic is less under control than in Europe. That said, this is the nature of their well-diversified business models, which Scope sees as credit friendly.
There will always be fluctuations in the business fortunes of the major international banks in some of their countries of operation, which may hit earning and prevent the shares from re-rating to their full potential. On the plus side, there is also less volatility at group level, as local fat-tail events are diluted in the larger earnings streams. Diversification is generally good for credit.
