2024-11-05 12:23:00
MADRID (Reuters) – The negative effect of lower interest rates on Spanish banks’ profitability should be limited and at least partly offset by rising loan volumes, the Bank of Spain said on Tuesday.
Any downward pressure on banks’ margins would be countered, at least in part, by a “more favourable evolution of the volume of activity,” the bank said in its semiannual financial stability report.
Spanish banks benefited when interest rates rose following an inflation hike in 2022 and 2023 by increasing the rates they charged on loans, while limiting the rates they paid on deposits.
That tailwind is now reversing and European lenders are having to adapt to a changing market environment as benchmark interest rates fall.
In the first half of this year, the consolidated net profit at Spanish banks rose 22% year-on-year, boosting their return-on-equity ratio (ROE) by 2.2 percentage points to 13.9%.
Net interest income, earnings on loans minus deposit costs, rose 14.5% year-on-year to June, down from a 27% rise in the first half of 2023.
expect lower borrowing costs will bolster lending activity. Against that backdrop, the stock of loans to the private sector in Spain has returned to an upward trend and grew a seasonally adjusted 0.5% between May and August.
The central bank said the main risk to the banks’ stability was a possible escalation of tensions in the Ukraine and the Middle East as well as the outcome of the U.S. elections because of potential repercussions on trade relations.
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**Interview with Ana López, Financial Analyst at Scope Ratings**
**Interviewer**: Thank you for joining us today, Ana. Spanish banks have reported record results in 2023, with an average return on equity of 13%. What factors do you believe contributed to these impressive figures?
**Ana López**: Thank you for having me. The strong performance of Spanish banks can be attributed to several factors. Firstly, even though interest rates were lower, banks were able to benefit from rising loan volumes. Increased demand for loans, particularly in real estate and personal financing, has helped maintain profitability despite narrowing margins.
**Interviewer**: Speaking of margins, the Bank of Spain mentioned that the negative effects of lower interest rates on profitability should be limited. How do you see the banks adapting to this environment?
**Ana López**: Yes, the banks are well-positioned to navigate this landscape. They have been actively diversifying their revenue streams beyond traditional interest income, focusing on fees from financial services and improving operational efficiencies. This diversification will help buffer them against the challenges posed by low interest rates.
**Interviewer**: With the economic landscape constantly changing, what do you predict for the Spanish banking sector in the near future?
**Ana López**: I foresee a cautious but positive outlook. As the economy continues recovering, if we see an uptick in interest rates along with sustained loan growth, Spanish banks could maintain or even improve their profitability. However, they will need to stay vigilant in managing credit risks as economic conditions evolve.
**Interviewer**: Thank you, Ana, for your insights into the resilience of Spanish banks in this fluctuating environment.
**Ana López**: Thank you for having me. It’s an exciting time for the sector!
