And to think that in the past banks were profitable ...


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When the banking sector had overcome a part of the accumulated problems after the 2007 crisis, the coronavirus has arrived, which is another major corrective to its business and results. It seems that this sector always takes the worst.

Its profitability will continue to be under high pressure as the pandemic prolongs negative interest rates over time and, even worse, the lack of slope of the curve, a depressing scenario for banks. That, not seeing a possible rate hike on the apprehensible horizon, they have become used to making their budgets without counting on it.

But the most important negative factor is the foreseeable increase in delinquencies. The guarantees and moratoriums have caused the blow on the banks to be delayed, but it will come and it will be strong. The current default rate is less than 5% but there is little doubt that the 1994 peak (9%) and perhaps the 2014 peak (13.5%) will be exceeded, because each percentage point that the GDP falls could increase the default at 70 basis points. To deal with these defaults, the banks have already made some provisions in the accounts for the first quarter, although it was only the appetizer.

Furthermore, a distinctive element of this crisis is that, just as in 2007, diversification in emerging markets was a protective factor, there are indications that the opposite will occur this time. Because, especially the Latin American countries, they are being tremendously hit by the virus with the consequent negative economic effect. So even BBVA and Santander can suffer greatly.

There are indications that diversification in emerging markets will not be a protective factor this time

This and the next are going to be very unfavorable years for the sector. Consensus of profits for listed banks in 2020 points to a drop of more than 50% over 2019 (when they already fell 19% over 2018). If before this crisis the return on capital was already below its cost, now it will be almost ridiculous. And the markets have responded with a sharp correction in bank stocks to a much lower level than their book value.

To not only say negative things, we will add that the pandemic has also brought some favorable elements in the banking sector. For example, the € 100 billion state-guaranteed loan scheme has been the most efficient in Europe, with more than 50% of disbursements in mid-June. In addition, the ECB has flooded the liquidity sector and paying it to take it (although a part will go to buy debt). With all this, the bank credit stock has reached a positive interannual rate in April for the first time in ten years. Also, confinement has shown that there is scope to reduce expenses. Because teleworking extends, as does the digital operation of the clientele. And this makes it clear that there is still excess installed capacity, which will end up being purified. There will be integrations. Although not precisely now because in the midst of the crisis there are other emergencies, the evaluations of each entity are difficult and the government also does not see new reductions in immediate staff well.

In this scenario, it is time to clean up, without worrying too much about the profit figure. And, although calculating the expected loss in the face of an external shock such as this is not accurate, we must put ourselves at the worst. As the market does and is styled in foreign banks (for example, in the recent presentations of results in the US). It is preferable to fall into overshooting rather than under infotainment. Especially when the capital situation is now stronger than in the last crisis and it allows it.

Difficult times for bank shareholders who, at the moment, will not receive dividends, having been banned until the most acute phase of the crisis passes. And perhaps they will not have it easy later if the supervisor said that capital levels must be restored, that the dividend is not a priority and recovery from its previous level can wait.

Carmelo Tajadura is an economist

Carmelo TajaduraCarmelo Tajadura

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