OBS Report: Banking sector
Spanish banks well positioned to cope with potential economic shocks
- The profit of large Spanish banks increased by 40% to 7.3 billion euros, despite the impact of the extraordinary tax on banks. It is now forced to make prudent provisioning in the face of the current drop in interest rates.
- In 2024, the solvency ratio of Spanish banks will be 13%, which positions them well to cope with potential economic shocks.
- The great challenges facing the banking sector: digitalisation, technological innovation and the Fintech revolution.
December 2024. OBS Business School, an institution belonging to Planeta Formación y Universidades, publishes the report Análisis del sector bancario español (Analysis of the Spanish banking sector) directed by Jaime Martínez Tascón, professor at the school and director of InveretiK.
The banking sector has undergone significant transformations over the last 20 years. It is the evolution into an increasingly digital market that does not necessarily require a very large physical infrastructure. Just look at the dramatic figures: a 35% decline in employment that has taken almost 90,000 jobs in just 10 years, closing 19,000 branches and leaving their number at levels not seen since 1976.
Mergers are the consequence of a financial crisis that has transformed the banking structure. Regulatory reforms have been necessary to improve the stability and resilience of the system, such as the implementation of Basel III, whose regulation is based on the strengthening of capital and liquidity requirements, as well as the European Banking Union, which implies stricter supervision and a single bank resolution mechanism. Some of the challenges currently facing the sector are common to all regions of the world: digitalisation, technological innovation and the Fintech revolution.
The Spanish banking sector
This year the banks as a whole faced a scenario of transition and challenges after a 2023 with historic profits. The sector in Spain has shown signs of recovery and stability with improvements in profitability, solvency and asset quality, and this is the result of prudent management and effective adaptation to the current economic conditions.
In the first half of 2024, Spanish banks generated a return on equity of 13.82%, an increase driven mainly by the 19.3% rise in net interest income, due to the higher interest rate environment. Fee and commission income also contributed to this rise, albeit more moderately, with growth of 2%. The profit of large Spanish banks increased by around 40% compared to 2023, reaching EUR 7,300 million despite the impact of the extraordinary tax on banks. And this growth, moreover, has not had an adverse impact on asset quality. Now both the Spanish and European banking sectors will have to face the current situation of interest rate cuts by the European Central Bank, which could reduce margins in the future. For this reason, prudent provisioning efforts are being made, which translates into a logical increase in their cost of risk, which rose to 0.56% in the first quarter of 2024. Moreover, NPL ratios are relatively stable at below 4%, a positive result compared to what is happening in emerging markets, particularly in the real estate and retail sectors.
In 2024, the solvency ratio of Spanish banks has remained at around 13%, which positions them well to cope with potential economic shocks.
Spanish banking by region
All banks in Spain are subject to the same regulation by the Bank of Spain and to European regulations, which ensures a uniform operating framework. However, the economic and demographic characteristics of each region influence the sector. Thus, Madrid and Catalonia have a high concentration of bank branches due to their population density and economic activity, while rural regions such as Castilla y León, Castilla-La Mancha and Extremadura have fewer, which can affect access to banking services. The less densely populated Autonomous Communities, as well as the rural areas of the so-called ‘empty Spain’, have a serious problem due to the remoteness of physical branches; in fact, 1.3 million Spaniards have difficulties in accessing cash. Moreover, banks in more developed regions tend to have higher profit margins due to greater economic activity and demand for financial services. The Madrid region leads in total assets due to the concentration of the headquarters of large banks and financial institutions, with Catalonia in second place.
At the end of 2023, the total amount of loans granted by banks in Spain amounted to more than 650,000 million euros, while the figure for bank deposits was 795,000 million. Approximately 30% of these are in the Madrid region, while Catalonia has a 15% share in deposits and 20% in loans. Andalusia and Valencia are close to 10% in both deposits and loans.
Many provinces have seen a consolidation of banks, with mergers and acquisitions reducing the number of banks but strengthening their financial position.
Electronic banking
The sector is facing increasing competition from Fintechs, especially in payments and microfinance. Almost 80% of Spaniards aged 25-44 use digital online banking services, 9.48 million users mainly from Madrid and Barcelona due to their high economic and financial activity. Seville also has a high level of assets and Alicante and Malaga stand out for their bank deposits. In terms of profits, Vizcaya and La Coruña obtain notable profits, reflecting the efficiency of their financial institutions.
Technology adoption has been fastest in urban regions such as Madrid and Barcelona, improving operational efficiency and customer experience, while there is a growing focus on financing sustainable projects, especially in regions such as the Basque Country and Catalonia.
Content written by:
Carmen García-Trevijano
OBS Business School's Press Office