Spanish Banks’ Deposit Rates Remained Very Low in Q1 2023; Unlikely to be Sustained

DBRS Morningstar released a commentary on Spanish banking system deposit trends following the Q1 2023 results publication of the large Spanish banks. Summary highlights from the commentary include:

• Large Spanish banks recorded a substantial increase in profitability on the back of low domestic deposit rates.
• According to our analysis low deposit rates are partly resulting in depositors transferring deposit balances to off-balance sheet products at an increasing pace.
• Spanish banks reported a material decrease of 3.5% Quarter over Quarter in aggregate domestic customer deposits during Q1 2023. This represents the largest quarterly historical decrease of more than EUR 40 billion in deposits
• We consider Spanish banks will be pressured to raise deposit rates in coming quarters in order to stop deposit outflows to higher yielding products.

“The reduction in deposits is explained by a shift toward off-balance sheet products, higher mortgage repayments using deposit balances, and some balance reduction due to higher inflation and interest rate payments” said Kevan Viagas, Assistant Vice President from the DBRS Morningstar Global Financial team. “This, in DBRS Morningstar’s opinion, evidences that deposit outflows at Spanish banks have been price-driven, as opposed to a flight to quality.”