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July 24, 2020
Elena IparraguirreMiriam FernándezLucía GonzálezAntonio RizzoMarta Heras
Spanish Banks:COVID-19 Changes Everything
Updated Expectations
2
– We expect the Spanish economy will only recover to pre-COVID-19 crisis levels in 2022, while a second wave of contagion or policy mistakes could lead to more severe contraction this year or a softer longer rebound.
– The outlook bias on Spanish banks has turned negative.
– We now expect credit costs will increase to 80-100 bps of average loans in 2020--more thandouble our previous estimate of 35 bps--and remain at similar levels in 2021.
– We forecast NPAs will peak at around 9.5% in 2021, and we expect some longer delays in divestingthe stock of legacy problematic assets from the previous downturn.
– Banks face tougher profitability challenges, with bottom-line results likely to halve this year, reinforcing the rationale for consolidation, particularly among midsize players.
– Capitalization should hold up well for most banks, but some have limited buffers to absorb a more negative shock than we currently forecast.
– Banks will make ample use of ECB funding facilities, and will continue building bail-in-ablecushions, but at a likely slower pace.
Banks' Outlook Bias Turned Negative…
Rating Actions In April 2020– All ratings affirmed.
– Outlooks on five banks revised to negativefrom stable.
– Outlook on one bank revised to stable frompositive.
– Existing negative outlooks on another threeinstitutions maintained at negative.
– Four banks kept stable outlooks.
We lowered the rating on Mulhacen to 'CCC+' with a negative outlook on July 14, 2020. Chart data as of July 24, 2020. S--Stable. N--Negative. Source: S&P Global Ratings.
Amid COVID-19, We Affirmed All Spanish Bank Ratings In April
3
Stable38%
Negative62%
Majority Of Banks Now Carry Negative Outlooks
N
N N
S S N
S S S N
N N
N
CCC
CCC+
B-
B
B+
BB-
BB
BB+
BBB-
BBB
BBB+
A-
A
A+
AA-Issuer credit rating Outlook Spain sovereign rating
N N
Our Latest Estimates Point To A 9.8% Decline In GDP Followed By Only A Partial Recovery In 2021
We Revised Our BICRA Economic Risk Trend To Negative
…As The Economic Shock Of The PandemicBecame Clear
(10%)
(8%)
(6%)
(4%)
(2%)
0%
2%
4%
6%
8%
2014 2015 2016 2017 2018 2019 2020f 2021f 2022f
Spain real GDP % Spain previous real GDP %
4
f--Forecast. Source: S&P Global Ratings. Data as of July 13, 2020. Source: S&P Global Ratings.
Compared To The Previous Downturn…
5
0
50
100
150
200
250
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
f
2021
f
2022
f
Spain public sector debt/GDP
Spain private sector debt/GDP
The Private Sector Carries Far Less Debt
1,0001,2001,4001,6001,8002,0002,200
0200,000400,000600,000800,000
1,000,0001,200,000
Dec
-04
Dec
-05
Dec
-06
Dec
-07
Dec
-08
Dec
-09
Dec
-10
Dec
-11
Dec
-12
Dec
-13
Dec
-14
Dec
-15
Dec
-16
Dec
-17
Dec
-18
Total Housing Transactions (Left Axis)
Average Price New Housing (Right Axis)
Housing Prices Are Well Below The Peak
0
500
1,000
1,500
2,000
Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
Bil.
€
Domestic corporate,household andNPISH loans
Domestic corporate,household andNPISH deposits
Banks' Funding Profiles Are Balanced
f--Forecast. NPISH--Nonprofit institutions serving households. Sources: S&P Global Ratings, Bank of Spain.
%
€/meter squared
Total housing transactions (left scale)
Average price new housing (right scale)
Domestic corporate, household, and NPISH loans
Domestic corporate, household, and NPISH deposits
1,2001,000
800600400
2000Th
ousa
nd (1
2 m
onth
s cu
mul
ativ
e)
Source: Ministerio de Transporte, Movilidad y Agenda Urbana.Source: S&P Global Ratings.
About 6% Of Household Exposures CurrentlyBenefit From Moratorium Schemes
The €100 Billion State Guarantee – Equivalent To Almost One Fifth Of Corporate Loans At End-2019 –Has Helped Maintain Banks' Credit Flow To Companies
Unprecedented Fiscal, Monetary, And RegulatoryMeasures Will Help Contain The Damage
Government-sponsored mortgages
49%
Government-sponsored consumer
lending7%
Banks-sponsored schemes
44%
Total granted: €41.6 billion
6
67.5
25.0
2.54.5
0
10
20
30
40
50
60
70
80
90
100Not allocated
Transportation-related
Tourism-related
Corporates
SMEs and self-employed
Source: Bank of Spain, Instituto de Credito Oficial, S&P Global Ratings.
Sta
tegu
aran
teed
loan
s(b
il. €
)
0
10
20
30
40
50
60
70
80
90
100 Other
Agro
IT
Textile
Food andbeverageTransportation
ConsumergoodsDurable goods
ProfessionalservicesConstruction
Tourism
Amount granted(until June 30)
Total to be allocated
– The short-term nature of the COVID-19 shock and the government and banks’ initiatives to support the private sector will contain losses.
– But we see annual domestic credit losses more than doubling compared to our previous estimates, standing at 80-100 bps both in 2020 and 2021.
– NPAs will peak in 2021 at about 9.5%, and it will take longer to work out the legacy stock of NPAs left by previousrecession.
COVID-19 Brought To A Sudden Stop The Previous Declining Trend Of Credit Losses And NPAs
Provisions And Nonperforming Assets Will Increase
0%
5%
10%
15%
20%
0%
2%
4%
6%
8%
10%
Credit losses as a % of average loans (left scale)Previous expected credit losses (left scale)NPA ratio (right scale)Previous expected NPA ratio (right scale)
7
0%
10%
20%
30%
40%
50%
60%
70%
0%
2%
4%
6%
8%
10%
12%
Real Estate Assets (left scale)
Non Performing Loans (left scale)
Coverage (right scale)
Nonperforming loans (left scale)
Real estate assets (left scale)
f--Forecast. NPA--Nonperforming asset. Sources: S&P Global Ratings, Bank of Spain.
Spanish Banks Face The Shock With Legacy NPAs From Previous Recession In Their Books
Data as a percentage of domestic gross loans. Data as of end-2019. Source: Banks' financial statements.
We Meaningfully Revised Our Credit Loss Expectations For This Year And The Next
Banks With Larger SME And Consumer Exposure Are More Prone To Asset Quality Erosion
Credit Costs Lower For Banks With LargerMortgage Books
0 50 100 150 200 250 300 350
BBVA
Santander
SCF
Sabadell
Caixabank
Bankia
Bankinter
Ibercaja
Abanca
Kutxabank
Caja Laboral
2020-2021 credit losses pre-COVID-19
2020-2021 credit losses COVID-19 impact
8
0% 20% 40% 60% 80% 100%
Santander
Sabadell
BBVA
Bankinter
Caixabank
Abanca
Bankia
Ibercaja
Laboral
Kutxabank
Domestic Loan Book
Mortgages Corporate Lending SME Lending
RE & Developers Other Retail
Domestic loan book
Real estate and developers
Other
SME lendingCorporate lending
bp--Basis point. CoR--Cost of risk. Sources: S&P Global Ratings, banks' financial statements.
SME--Small and midsize enterprise. Data as of end-2019. Source: Banks' financial statements.
Cumulative CoR (bps)
Spanish Banks' RoE Will Decline Significantly In 2020, Improving Only Slightly In 2021
Higher Credit Losses And Earnings Pressure WillWeaken Already Modest Profitability Prospects…
0%
2%
4%
6%
8%
10%
12%
14%
Bankinter SCF Caixabank BBVA Laboral Santander Cecabank Kutxabank Sabadell Abanca Ibercaja Bankia*
2019 2020f 2021f
RoE
9
*Data for BFA Bankia before minorities. f--Forecast. RoE--Return on equity. Sources: S&P Global Ratings, banks' financial statements.
Midsize And Smaller Players Will Likely Face More Profitability And Tech Disruption Challenges
Poor Earnings Prospects Have Driven Down Equity Valuations
…Strengthening The Case For FurtherConsolidation And Depressing Equity Valuations
10
0.0x
0.2x
0.4x
0.6x
0.8x
1.0x
1.2x
1.4x
Bankinter Santander BBVASabadell Bankia Caixabank
Source: Banks' financial statements as of end-2019. Source: Capital IQ.
0 100 200 300 400
BBVA
Caixabank
Santander
Bankia
Sabadell
Bankinter
Kutxabank
Abanca
Unicaja
Ibercaja
Liberbank
Laboral
Bil. €
Domestic assets
2019
2020f
2021f
Capital Will Hold Up, But Some Banks Have MoreLimited Buffers Against A Harsher Scenario
11
Arrows signify buffer. Pink arrows signify limited buffer. f--Forecast. RAC--Risk-adjusted capital. Source: S&P Global Ratings.
S&
P G
loba
l Rat
ings
RA
C r
atio
(%)
Strong (10%-15%)
Adequate (7%-10%)
Moderate (5%-7%)
Weak(3%-5%)
Very Weak (0%-3%)
Banks Largely Borrowed The Maximum ECB Long-Term Funding Allowed
Some Of These Funds Will Likely Be Channeled To Build Government Bond Portfolios
Revised TLTRO III Is An Attractive Funding OptionFor Banks But It Could Reinforce The Sovereign-Bank Nexus
12
ECB--European Central Bank. TLTRO--Targeted longer-term refinancing operations. Source: S&P Global Ratings.
Source: Bank of Spain.
0 20 40 60
Laboral
Ibercaja
Kutxabank
Abanca
Bankinter
Bankia
Sabadell
BBVA
Caixabank
Santander
TLTRO-III take up
Bil. €
0
50
100
150
200
250
300
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
Gov
ernm
ent
bond
hol
ding
s (b
il. €
)
Most Banks Are Already Compliant Or Close To Complying With MREL
ALAC Buffers Are Getting Closer To The Required Thresholds
MREL Buildup Will Continue, But At A Slower Pace
0% 5% 10% 15% 20% 25% 30%
Santander*
BBVA
Bankia
Sabadell
Caixabank
Ibercaja
Abanca
Kutxabank
Bankinter
MREL built MREL requirement
13
0%
1%
2%
3%
4%
5%
BBVA Santander Sabadell Bankia Caixabank
2020f 2021f 2022f
*S&P Global Ratings estimate. Data for MREL buildup as of Q1 2020 except for Ibercaja (Q4 2020). MREL--Minimum requirement for own funds and eligible liabilities. RWA--Risk-weighted asset. Source: S&P Global Ratings, banks' financials.
ALAC--Additional loss-absorbing capacity. f--Forecast. Sources: S&P Global Ratings, Bank of Spain.
– Absent urgent regulatory need, bailinable debt issuance to fill gaps or improve the subordinated MREL components, will likely slow.
– No ratings on the five banks with a defined bail-in resolution strategy currently benefit from ALAC uplift, although some are closer to the thresholds than a year ago.
– For other banks with sale-of-business resolution strategies, ALAC uplift would be contingent on assurance that all senior creditors would be treated similarly in resolution.
MREL/RWAs
ALA
C b
uffe
r/R
WA
s
Threshold for one notch of uplift
Threshold Santander and BBVA
Related Research
– Global Banks Outlook Midyear 2020: Temporary Shock, Profound Implications, July 9, 2020
– The $2 Trillion Question: What's On The Horizon For Bank Credit Losses, July 9, 2020
– ECB Set To Ease Regulatory Hurdles To Eurozone Bank Consolidation, July 3, 2020
– Asset Quality Not ECB Liquidity Will Determine Eurozone Banks' Fates, July 2, 2020
– Banking Industry Country Risk Assessment: Spain, June 18, 2020
– How COVID-19 Is Affecting Bank Ratings: June Update, June 11, 2020
– The Seven Key Questions We Ask About Eurozone Government Debt Profiles, May 21, 2020
– Spain, May 20, 2020
– Government Job Support Will Stem European Housing Market Price Falls, May 15, 2020
– Outlook Revised To Negative On Several Spanish Banks On Deepening COVID-19 Downside Risks, April 29, 2020
– Spanish Banks Are At A Crossroads, March 6, 2020
– Tech Disruption In Retail Banking: Spanish Banks Have Time to Adapt, But Risk Falling Flat, Feb. 17, 2020
– Contingency Risk From IRPH-Linked Mortgage Litigation Claims Is Reducing for Spanish Banks, Sept. 19, 2019
14
https://www.capitaliq.com/CIQDotNet/CreditResearch/viewPDF.aspx?pdfId=44900&from=Researchhttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45320188&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45274358&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45260793&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45156975&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45106414&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44935964&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44042919&From=SNP_REShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44897385&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44747438&From=SNP_CRShttps://www.standardandpoors.com/pt_LA/delegate/getPDF;jsessionid=5B4F5065EDF83A9014F52D9394B74F81?articleId=2393472&type=COMMENTS&subType=https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=43764444&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=42455897&From=SNP_CRS
Lucía GonzálezAssociate Director [email protected]+91-788-7219
Miriam FernándezAssociate [email protected]+34-91-788-7232
Analytical Contacts
15
Elena IparraguirreDirector – Lead Analyst Spain & [email protected]+34-91-389-6963
Antonio RizzoAssociate [email protected]+91-788-7205
Marta HerasRating [email protected]+91-389-6967
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]
16
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Spanish Banks:�COVID-19 Changes EverythingUpdated ExpectationsBanks' Outlook Bias Turned Negative……As The Economic Shock Of The Pandemic Became ClearCompared To The Previous Downturn… Unprecedented Fiscal, Monetary, And Regulatory Measures Will Help Contain The DamageProvisions And Nonperforming Assets Will IncreaseCredit Costs Lower For Banks With Larger Mortgage BooksHigher Credit Losses And Earnings Pressure Will Weaken Already Modest Profitability Prospects……Strengthening The Case For Further Consolidation And Depressing Equity ValuationsCapital Will Hold Up, But Some Banks Have More Limited Buffers Against A Harsher ScenarioRevised TLTRO III Is An Attractive Funding Option For Banks But It Could Reinforce The Sovereign-Bank NexusMREL Buildup Will Continue, But At A Slower PaceRelated ResearchAnalytical ContactsSlide Number 16