Spanish Banks: FY20 Earnings Significantly Down, but Credit Risk Still to Fully Materialise

DBRS Morningstar has released a commentary about large Spanish banks’ FY20 earnings, with the banks reporting a significant negative impact on domestic earnings due to the COVID-19 crisis. However, DBRS Morningstar notes Spanish banks’ asset quality indicators are yet to show deterioration as they appear to be identifying credit risks at a slower pace than other European banks.

Key Highlights include:

• Results were severely affected by the COVID-19 crisis, and the very challenging economic environment. Spain was the worst performer of the EU-27 countries with GDP declining 11% in 2020, compared to an average reduction of 6.3%.
• Aggregated domestic profit was EUR 3.4 billion for FY20, down 56% Year-on-Year (YoY). All banks included in the sample reported a decline in domestic profits, ranging from 40% to 74%.
• DBRS Morningstar considers that Spanish banks appear to be identifying credit risks at a slower pace than other European banks. Spanish banks experienced a slight increase in Stage 2 loans in 2020 but this remains limited compared to other countries, despite the fact that Spain has suffered the largest economic impact of the EU-27 countries from the COVID-19 crisis to date.

“We consider that the early recognition of credit risks related to COVID-19 would be more beneficial to the Spanish economy and the entire Spanish Banking System compared to a delayed recognition approach. Spanish banks retain adequate cushions over their capital requirements, giving them flexibility to absorb potential losses from COVID-19. However, at the moment, Spanish banks appear to be identifying credit risks at a slower pace than other European banks.“ said Pablo Manzano, Vice President.