“Further balance-sheet repricing will drive revenue growth in 2023,” said Chiara Romano, associate director in Scope’s banking team. “The ECB is not done raising rates. Banks have positive gearing to further increases and we expect competition for deposits to remain modest in the near term. Further out, cost of funding will pick-up, driven mainly by more expensive wholesale funds but eventually also by deposit repricing.”

Spanish banks have accelerated repayments of their TLTRO drawings at a faster pace than banks in other European countries but outstanding repayments look manageable and are unlikely to push the banks anywhere near danger zones on the liquidity ratios. Romano cautions about cost trends, though: “inflationary pressures have so far not derailed banks’ efforts to keep their cost bases in check but whether the strong performance on operating expenses can be sustained in the medium run is a key question.”

The combination of weaker growth, inflation, and higher rates will weigh on affordability and will drive a deterioration in asset quality in 2023 across residential mortgages, SME and unsecured consumer lending. “But Spanish banks are entering this season with much stronger balance sheets, the legacy of many years of de-risking and better origination standards. We expect credit losses to be higher than in 2022 but to remain at manageable levels,” Romano said. Domestic commercial real estate exposure has declined to below 6% of lending to the private sector, at the lower end of large European countries.

In 2023, net interest income in Spain will pick up strongly. Banks are indicating growth rates between 15% and 30% as assets reprice. Overall, interest income is positively geared to rising rates, given the material share of variable-rate lending: 73% of Spanish mortgages are floating rate. Interest margins are widening thanks to a high proportion of deposit funding and no evidence so far of pass-through of higher rates to depositors in comparison to other euro area countries.

Most banks have kept their dividend pay-out ratios unchanged, ranging from 40% to 60%. An exception is Sabadell, which plans to lift its pay-out from 32% to 50% in 2023 to bring returns into line with competitors. Several banks have opted once again for a combination of cash dividends and share buybacks to preserve retail investor confidence while taking advantage of low multiples.

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Scope has subscription ratings on:

• Banco Bilbao Vizcaya Argentaria SA
• Banco Santander SA
• Banco de Sabadell SA
• Bankinter SA
• Ibercaja Banco SA
• Kutxabank SA

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