CaixaBank, Sabadell Show Low-Rate Challenges for Spain’s Banks

(Bloomberg) -- Spain’s retail banks are feeling the pinch from a protracted period of low interest rates, with income from lending at CaixaBank SA and Banco de Sabadell SA falling short of analysts’ estimates and both banks cutting the outlook for their core lending businesses.

CaixaBank on Friday revised its guidance for core revenue this year to about 1% from 3%. Sabadell said net interest income may fall as much as 1%, after previously predicting growth of 1% to 2%. Share of both banks slumped, with CaixaBank falling the most in almost six months and Sabadell hitting a record low.

The results highlight the challenges ahead for Spain’s large retail banks as the prospect of lower interest rates for longer weighs on their main lending business. Banks in Europe have had to contend with negative rates for half a decade already, and European Central Bank President Mario Draghi on Thursday set the stage for another round of monetary stimulus in September to combat the euro area’s severe economic slowdown.

Both CaixaBank and Sabadell were able to offset the impact through other sources of income in the second quarter. At Sabadell, fee income grew 11%, helping compensate for a 0.5% drop in net interest income. At CaixaBank, trading and dividends outstripped income from lending, which grew just 0.9%. Dividends were driven by its stake in Spanish phone company Telefonica SA.

Shares Slump

CaixaBank fell 6.5% at 9:29 a.m. in Madrid trading, the most since Feb. 1, and Sabadell lost 5%.
Like larger rival Banco Santander SA, CaixaBank has been cutting jobs to reduce costs, resulting in a one-off restructuring charge of 978 million euros after the lender reached an agreement with unions for 2,023 voluntary redundancies. Underlying profit rose by 30% to 774 million euros when those costs are stripped out.

Sabadell put behind some of the questions raised about its capital strength following costs tied to a botched software migration at its British unit TSB. The bank’s fully loaded CET 1 ratio, a measure of capital strength, rose 20 basis points to 11.2% with the lender saying that offloading of non-core assets should help it meet its year-end target of 11.6%.

Sabadell’s travails at TSB have caused investors put a microscope to Sabadell’s capital levels, which were the lowest among four Spanish banks tested in European Bank Authority’s stress tests in November.

The bungled migration of the group’s IT platform to TSB last year generated additional costs of more than 320 million euros and calls from British lawmakers for the unit’s CEO Paul Pester to step down, which he did in September. His successor, Debbie Crosbie, has been set the task of reducing costs, with a new plan expected toward the end of the year.

To contact the reporter on this story: Charlie Devereux in Madrid at cdevereux3@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel

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