April 19, 2021

The difficult bank profitability | Economy

The difficult bank profitability | Economy

The results for 2018 of Spanish banks have been known in the last week. As a whole, have improved significantly compared to 2017. Paradoxically, after a few weeks in January of positive market performance in the sector, the reaction of the market after knowing the profit data was negative. You should not take exaggerated readings of a cyclical stock market data, but it seems timely a reflection on the tension over banking actions for some time. Despite the strong restructuring of the sector since 2012, the market continues to understand that there are notable challenges and threats ahead.

I urge a methodological analysis. Although the total results of the sector have improved, when using relative profitability indicators, which are of more interest to investors -such as, for example, the ROE (profits on own resources) -, it is observed that the image obtained is not He is so happy, since in many cases he does not cover the cost of capital. Something that is not a new phenomenon. The strong regulation is decisive in this context. There is good mass, but it is very difficult to lift a souffle like that. In addition, there is a sensitivity of the Stock Exchanges -with a certain weight in the short term- to very specific corporate and reputational issues.

Banking is one of the most transversal economic sectors, if not the most. Connected with other productive activities through financial flows. Any deceleration of GDP is immediately felt in the banking business. It's the voice of the bank. If an instrument fails or is badly accompanied, less is heard. It is the sector that receives the most impacts when the economy shows weaknesses in its growth -now, now- or when there are external threats. In this last case, any doubt (or sum of them) on institutional aspects such as the resolution of Brexit, European integration, the Banking Union or the economic and financial resilience of a nearby country (see, Italy) impacts on financial institutions throughout the continent. Even more so when it comes to a bank like the Spanish, with so much European and global presence. The emerging have also made a dent more than once.

Two other important factors One, given the slowdown in the eurozone economy, a growing number of analysts believe that, although the European Central Bank could initially maintain the interest rate rise until the end of summer, it is likely that, at least, it should extend the terms of the roadmap for successive increases in types or withdrawals of stimuli. The financial margins would remain very narrow. The downward structural pressure on banking income would be prolonged. Second challenge: the everlasting digitalization. The competition of new more technological operators, with much less structure and much more "deregulated" activity, can further erode the business and the value of banking actions. Interestingly, there is no other answer but to continue betting on more digitization, but also to demand an equalization of regulation with new competitors.


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