By Chiara Romano, Associate Director, Financial Institutions

In 2021, Spanish banks managed to offset flat to mildly lower net interest income in 2021 with stronger fee and commission income. Their guidance for 2022 is encouraging: banks are guiding to flat/slightly positive core NII and fee and commission growth in a scenario of flat interest rates.

Growth in fee and commission income in 2021 was strong across the board, with BBVA Spain and Bankinter standing out with growth of 21.5%. Banks expectations of a favourable F&C trajectory in 2022 rest on their base case for interest rates remaining low and the positive dynamics of long-term savings and asset under management.

With odds of policy rate hikes increasing, we see upside risks to this revenue scenario. Rising rates (especially if coupled with a steepening of the yield curve) will benefit net interest income. Partly offsetting these benefits, higher rates would weaken the case for clients to invest in risky assets, possibly detracting from fee and commission growth. However, given the revenue structure of Spanish banks, the first effect should prevail.

This positive outlook for core revenues is offset by the end of the preferential rate for TLTRO III, which will weigh on results in 2022 and 2023. For example, CaixaBank said that the benefit from TLTRO III was EUR 400m (or 6% of total NII) in 2021. While the preferential rate will still support H1 2022 results, it will no longer be there in the second half of the year.

The 2021 V-shaped rebound in net income is encouraging, although profitability in 2021 still lagged pre-pandemic levels. We expect 2022 profitability to increase, driven by a further decline in cost of risk and improving core revenues offsetting the impact of the end of preferential TLTRO rate.

Banks’ ability to control growth in operating expenses despite inflationary pressures will be the main catalyst for further structural gains in profitability. The banks maintained good control of operating expenses in 2020 and 2021. Institutions that initiated efficiency plans early on or which have retained a continuous focus on cost control saw marked improvements. In 2022 we expect savings to feed increasingly through income statements, with Sabadell and CaixaBank especially well placed because of ongoing transformation programmes and merger synergies.

Further declines in cost of risk (provisions as a proportion of average loans) will also be a tailwind for profits in 2022. Cost of risk dropped materially year-on-year for several banks, though the declines were milder for Santander Spain and Sabadell. For 2022, both banks have indicated a normalisation to levels closer to 2019, which should boost their income.

The impact of the expiry of moratiorium measures on NPL inflows has been very limited. The key remaining question mark around the impact of the Covid-19 crisis on Spanish asset quality revolves around the performance of facilities guaranteed by State agency Instituto de Crédito Oficial, which will start to come up for repayment from the second quarter of 2022. However, given the State guarantees, the impact on additional provisioning by the banks is likely to be limited.

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