If you’re Spanish, there’s never been a better time to be a sports fan. First Spain win football’s European Championship, its first major trophy for 44 years. Next Rafael Nadal wins Wimbledon, the next step in his seemingly inevitable rise to become the world’s best tennis player. Then Carlos Sastre wins the Tour de France, the third Spaniard in a row to win cycling’s most prestigious race.
But if you’re a supporter of Spanish banks, your outlook will depend on which institutions you have backed.
In late July, Spain’s two biggest banking groups produced results that must have had victims of the global credit crunch weeping. First, BBVA announced a rise in operating profit of 12% to €5.5 billion for the first half of 2008; its return on equity is one of Europe’s highest, at 25%, and its return on assets a more than healthy 1.25%.
The next day, its main rival Santander produced equally impressive numbers. Its profit rose 22% in H1 2008, to €4.73 billion. Revenues grew 16% over the period, whereas costs grew by just 5%, enabling operating income to grow 26%.
Other core numbers are remarkably similar between the two: Santander’s group efficiency ratio is 40.4%; BBVA’s is 40.1%. Tier 1 and core capital at BBVA stand at 7.7% and 6.3%; at Santander the respective numbers are 7.8% and 6.3%.
Such impressive results show why both banks now rank among the top 15 banks in the world by market capitalization. But the key to their performance has been diversification into non-Spanish markets. Both have thriving businesses in Latin America. Santander is building its subsidiary, Abbey, into the leading mortgage lender in the UK, while BBVA looks to Asian expansion as it grows its strategic stake in China’s Citic, as well as in the US through its acquisition of Compass.
Now the benefits of those overseas expansion plans are about to be thrown into sharp relief. Spain’s economy appears to be in deep trouble. Much of the growth of the banking industry in Spain in the past 20 years has been linked to the construction industry; banks lent to property developers to build homes, and then lent money to homeowners so that they could purchase them, with a period of negative real interest rates this decade adding fuel to the fire.
That virtuous circle is about to turn vicious. Beatriz Corredor, Spain’s housing minister, recently said the sector was "in deep crisis", citing the huge amount of oversupply in the market. One million new dwellings stand empty. Pedro Solbes, the finance minister, calls it "the most complex crisis we have ever seen".
The first major casualty was Martinsa-Fadesa, Spain’s largest property developer, which went into administration in mid-July. Its biggest creditor was Banco Popular, whose shares plunged on the news. Also hit were the stock prices of Spain’s other smaller listed banking groups, Sabadell and Bankinter.
Spain’s largest publicly quoted banks should survive an impending property crash. The regulator, the Bank of Spain, adopts a tough approach to the concentration of risk in listed banks’ books. But, as predominantly domestic banks with large exposure to the property market, such institutions as Popular, Sabadell and Bankinter are bound to suffer.
More worrying is the impact that a housing and construction crisis will have on the savings banks sector. The main two such banks, Caja Madrid and La Caixa, are generally regarded as being at least as well run as their listed peers. But in Spain’s network of smaller cajas, the problems could be insurmountable. Bankers in Madrid say it is inevitable that some of these will run into trouble; but they have much faith in the Bank of Spain to arrange for troubled savings banks to be swallowed up by their larger, more stable cousins before any Northern Rock-style fallout hits the market.
Let’s hope they are right. Because for the next couple of years, success stories might be hard to find in Spanish domestic banking.