Five Takeaways From Spanish Banks' Second-Quarter Earnings

(Bloomberg) -- Spanish banks posted solid second-quarter earnings with four of the country’s six largest lenders earning more than forecast. The banks have capitalized on five years of growth in Spain to improve the quality of their assets, beef up their core capital and improve their profitability.

With improving asset quality, low provisions and reviving loan growth, they have hit “a cyclical sweet spot”, according to Scope Ratings.

Here are five key takeaways from last week’s earnings:

1. Integrations Ahead of Schedule

Bankia SA and Banco Santander SA reported that their respective integrations of Banco Mare Nostrum SA and Banco Popular Espanol SA are being delivered ahead of schedule, allowing for the early reaping of cost synergies. Bankia raised its synergies target for 2018 to 100 million euros from 66 million euros and the advanced calendar will mean a 2 percent year-on-year decline in costs in 2018.

2. Fast Tracking of Merger Integration Opens Door For More M&A

With the integration ahead of schedule, Bankia’s board will have more time to work out how it can help the government to carry out the full privatization of the bank after its rescue in 2012. That may involve a merger with one of its rivals or further acquisitions to boost profitability. However, a full return to private ownership remains a remote prospect: the remaining state holding is still worth less than half of what the last government paid for it, and the new minority government may hesitate to expend political capital on a sale that would crystallize losses for the state.

3. Business in Spain Ready to Take Off

Provisions are down (15 percent from year earlier) and most banks managed to reduce their bad loans ratios after offloading toxic real estate assets in the past year.

Net interest income was down 2 percent, but that reflects the fact of negative official interest rates in the euro zone. The European Central Bank has indicated it won’t follow the Federal Reserve and now the Bank of England in raising rates until well into next year. While the prolonged period of low interest rates should support the economy and therefore loan growth, the margin expansion that Spanish banks really need will have to wait a while yet.

4. Foreign Forays a Mixed Bag

For years, Spanish banks have been split between Santander and BBVA, which have become global banks with footprints in Latin America, Europe and the U.S., and the rest, which have limited themselves to the Spanish market. But recently some of those banks have reached out beyond Spain’s borders - with mixed results.

CaixaBank’s expansion into Portugal has been smooth, reflected in the second-quarter boost from its integration with Portugal’s Banco BPI SA as profits more than tripled to 83 million euros. Meanwhile Banco de Sabadell SA paid the price for the meltdown of its technological platform as it tried to migrate customers at its U.K. unit, TSB Banking Group Plc. The fiasco meant the bank was hit with a charge of 203 million euros ($236 million) which included 40 million euros for fraud losses and 92 million to cover future customer claims for damages.

5. Capital Shortage?

Trying to work out what Santander’s core capital levels are can be confusing. The bank said in a statement that its fully-loaded CET1 ratio was 10.8 percent at the end of the second quarter, but Chief Executive Office Jose Antonio Alvarez admitted that the rate falls back to 10.62 percent when the full effects of the newly-enforced IFRS 9 accounting standard are included. With Santander generating an average of 10 basis points of organic capital growth every quarter, that may make reaching the 2018 target of 11 percent difficult. But Alvarez said the bank’s 18 basis-point gain in the second quarter shows it’s achievable.

Nor is Santander the only bank that could do with a better capital cushion: rank the 48 members of the Stoxx Europe 600 Banks by fully-loaded CET1 ratio, and you will find Santander alongside BBVA, CaixaBank, Bankia and Bankinter all in the bottom quartile. With Sabadell having shed 150 basis points this year, due mainly to the TSB fiasco, there isn’t a single Spanish bank in the top half of that table.

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, Geoffrey Smith, Charles Penty

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