Banking Sector: Recovery Moving On To Firmer Footing
BMI View: The outlook for Spain's banking sector will improve further in 2014, as banks reduce their reliance on Spanish sovereign debt and ECB funding, and bolster capital buffers in the run up to eurozone stress tests. That said, the sector's recovery will be a gradual one, with ongoing household deleveraging set to weigh on profits and asset quality for some time to come.
The recovery of the Spanish banking sector looks set to continue in 2014, with the intensive restructuring and recapitalisation undertaken as part of the sector's EUR41bn bailout placing the recovery on increasingly solid ground. Against this backdrop, bank profits soared in 2013, with Banco Sabadell and Bankiter's profits rising by over 170% and 58% respectively, while Banco Popular swung from a loss of EUR2.5bn to a EUR325mn profit.
Although we expect the profitability of the sector to remain healthy in 2014, household deleveraging will dictate that this is in no part due to a revival in domestic lending ( see chart below). Indeed, the recent rise in trading profits has been largely the result of the eurozone carry trade, where Spanish banks' have borrowed money cheaply from the ECB to buy high-yielding sovereign debt from the government. Spanish banks have almost tripled their holdings of Spanish government debt since 2008, from EUR94bn to EUR272bn in at end-2013.
|Carry Trade Supporting Profits|
|Spain - Components Of Banking Sector Assets, % chg y-o-y 12mma|