Banking activity in Spain

Highlights

  • Activity impacted by seasonality.
  • Good performance of net fees and commissions.
  • Improvement of efficiency due to the steady reduction of expenses.
  • Lower impairments and provisions, solid asset-quality indicators.

Business activity (1)
(Year-on-year change. Data as of 30-09-2018)

(1) Excluding repos.

Net interest income/ATAs
(Percentage)

Operating income (Millions of Euros)

Net attributable profit (Millions of Euros)

Breakdown of performing loans under management (1)
(30-09-2018)

Breakdown of customer funds under management (1)
(30-09-2018)

(1) Excluding repos.

(1) Excluding repos.

Macro and industry trends

According to the latest information from the National Institute of Statistics (INE for its acronym in Spanish), the Spanish economy grew quarterly by 0.6% in the second quarter of 2018, which results in a slight moderation in growth compared to the previous year. The most recent indicators show that this solid advance of the GDP has continued further in the second part of the year, despite increased uncertainty, supported by robust domestic factors related to the improvement of the labor market and favorable financial conditions. Both monetary and fiscal policy continue to support growth, while the recent depreciation of the euro and robust demand in the euro zone could give an additional boost to exports.

Regarding the Spanish banking system and according to July 2018 data from the Bank of Spain (latest published data), the total volume of lending to the private sector (household and corporate) continued to decline year-on-year (down 3.0%). Non-performing loans in the sector decreased significantly (down 27.3% year-on-year as of July 2018) due to the completion of a major sale of real-estate assets by one of the entities in the system during the first quarter of the year. At the end of July, the sector’s NPL ratio was 6.35%, that is 25.1% below the figure registered in the previous year.

Activity

The most relevant aspects related to the area’s activity year-to-date as of 30-September-2018 were:

  • Lending (performing loans under management) are down by 2.0% compared to the figure at the end of December 2017 (down 1.5% year-on-year), mainly due to the reduction in the mortgage portfolio (down 2.5% in the last nine months) and in the public sector, corporates and other commercial portfolios (down 7.1% as a whole for the same period). In contrast, consumer financing and credit cards maintained a very positive performance (during the course of the year up 16.8%), which, together with the good performance of the SME portfolio, offset the reduction of mortgage loans.
  • In asset quality, there was a further reduction in non-performing loans balances that positively affected the area’s NPL ratio, which reduced by 22 basis points over the last three months to 5.0%. The NPL coverage ratio closed at 56%.
  • Customer deposits under management grew by 0.6% in the quarter and remained flat compared to the close of December 2017 (up 0.1%). By products, there was a further decline in time deposits (down 24.1% year-to-date), which has been offset by the increase in demand deposits (up 9.3%).
  • The off-balance-sheet funds showed an increase of 0.4% with respect to the balance reached in June, with positive net contributions to investment funds despite of the unfavorable evolution of the markets. The comparison with the closing of December 2017 continues to show a positive evolution (up 3.4%).

Results

The net attributable profit generated by the Banking Activity in Spain during the first nine months of 2018 reached €1,167 million, which represents a year-on-year increase of 10.5%, strongly supported by the favorable performance of commissions, operating expenses and provisions. The year-to-date highlights of the area’s income statement are:

  • Net interest income in the first nine months declined year-on-year by 1.5% although it remains stable in the quarter. The smaller contribution from targeted long-term refinancing operations (TLTRO) explained most of this decline.
  • Positive performance of net fees and commissions (up 8% year-on-year), which offset the decline in net interest income. There was a significant contribution from asset management fees and banking commissions.
  • Lower contribution from NTI compared to the same period of previous year (down 19.2%), associated with lower ALCO portfolio sales, taken into consideration the exceptionally good first half of last year.
  • Reduction in other income/expenses (down 51.5% year-on-year). One of the aspects explaining this is the greater contribution made to the SRF compared to the same period of 2017. Also, net earnings from the insurance business showed an increase of 11.3%.
  • As a result, the gross income decreased by 4.6%.
  • Operating expenses continued the downward trend observed in previous periods (down 4.0% year-on-year).
  • The efficiency ratio closed at 54.4%, below the figure registered at the close of 2017 (54.9%), and operating income fell by 5.3% during the last twelve months.
  • Decline in impairment losses on financial assets (down 34.5% year-on-year) explained by lower gross additions to NPLs and loan-loss provisions for large customers. As a result, the cumulative cost of risk stood at 0.22% as of 30-September-2018.
  • Lastly, provisions (net) and other gains (losses) showed a year-on-year decline of 28.7%.

Financial statements and relevant business indicators (Millions of Euros and percentage)

IFRS 9 IAS 39
Income statement Jan.-Sep. 18 ∆% Jan.-Sep. 17
Net interest income 2,749 (1.5) 2,792
Net fees and commissions 1,268 8.0 1,174
Net trading income 318 (19.2) 394
Other operating income and expenses 182 (51.5) 375
of which Insurance activities (1) 356 11.3 320
Gross income 4,516 (4.6) 4,734
Operating expenses (2,455) (4.0) (2,556)
Personnel expenses (1,395) (3.4) (1,443)
Other administrative expenses (844) (2.9) (869)
Depreciation (216) (11.3) (244)
Operating income 2,061 (5.3) 2,178
Impairment on financial assets not measured at fair value through profit or loss (281) (34.5) (429)
Provisions or reversal of provisions and other results (207) (28.7) (290)
Profit/(loss) before tax 1,574 7.9 1,459
Income tax (404) 0.9 (401)
Profit/(loss) for the year 1,169 10.5 1,058
Non-controlling interests (2) 8.2 (2)
Net attributable profit 1,167 10.5 1,056
  • (1) Includes premiums received net of estimated technical insurance reserves.
IFRS 9 IAS 39
Balance sheets 30-09-18 ∆% 31-12-17
Cash, cash balances at central banks and other demand deposits 18,559 37.9 13,463
Financial assets designated at fair value 103,418 30.1 79,501
of which loans and advances 21,474 n.s. 1,312
Financial assets at amortized cost 193,643 (12.5) 221,391
of which loans and advances to customers 167,856 (8.4) 183,172
Inter-area positions 4,276 136.8 1,806
Tangible assets 937 6.9 877
Other assets 5,973 151.0 2,380
Total assets/liabilities and equity 326,807 2.3 319,417
Financial liabilities held for trading and designated at fair value through profit or loss 68,819 86.9 36,817
Deposits from central banks and credit institutions 41,338 (33.6) 62,226
Deposits from customers 173,925 (2.2) 177,763
Debt certificates 31,613 (5.1) 33,301
Inter-area positions - - -
Other liabilities 3,142 n.s. 391
Economic capital allocated 7,971 (10.6) 8,920
Relevant business indicators 30-09-18 ∆% 31-12-17
Performing loans and advances to customers under management (1) 163,868 (2.0) 167,291
Non-performing loans 9,590 (11.5) 10,833
Customer deposits under management (1) 174,972 0.1 174,822
Off-balance sheet funds (2) 64,150 3.4 62,054
Risk-weighted assets 102,020 (5.7) 108,141
Efficiency ratio (%) 54.4 54.9
NPL ratio (%) 5.0 5.5
NPL coverage ratio (%) 56 50
Cost of risk (%) 0.22 0.32
  • (1) Excluding repos.
  • (2) Includes mutual funds. pension funds and other off-balance-sheet funds.