Spanish Banks get fed up with the ECB’s Requirements

Spanish banks continue crying out against the European Central Bank (ECB) for its monetary policy and its insistence on maintaining capital levels that it considers very high for the current business circumstances.

Each forum, each seminar, each meeting with the Bank of Spain (BoS).

The EBA or the ECB is an occasion to claim more relaxed capital conditions and end, once and for all, the normative avalanche that weighs on Financial institutions since the 2008 crisis.

And it is that the six largest Spanish banks closed 2019 with a maximum quality capital (CET 1) of 11.98%, compared to a return measured in terms of own resources (ROE) of 8%.

“It makes no sense,” says a bank manager and the worst is that, “higher demands are being raised.”

From all levels, public and private, banks are demanding greater flexibility so as not to strangle the income statements.

The subject comes from afar. From when the rules of Basel II were in force.

Cees Maas, vice president of the Institute of International Finance and president of the ING Group, assured already in 2005.

Three years before the international financial crisis, that the accumulation of regulation and regulatory complexity caused additional costs to the bank.

Luis de Guindos, as vice president of the ECB, recommended that banks grant more credits to expand the business.

Instead of increasing dividends.

A year ago, he even wondered if the capital cushion of the entities was sufficient to cover unwanted contingencies and was an advocate for the accumulation of capital during good economic cycles to use them.

If necessary, in the phases of economic correction. Mario Draghi, president of the ECB until last November 1 unlinked the monetary policy of the European institution of the bad health of the banking business.

The cases of Banco Santander and BBVA

The data does not seem to prove them right. Last year, Banco Santander obtained a net profit of 6,515 million euros, 17% lower than the previous year.

It closed the year with a maximum quality capital (CET 1) of 11.65% and an ROE profitability of 9.10%.

In 2008, when the effects of the bankruptcy of Lehman Brothers had not moved to Spain, the entity, which was then chaired by Emilio Botín, earned 8,876 million euros, becoming the fourth largest bank in the world for profits.

Its “core capital” – the term that collected the highest quality capital – reached 7.23% and profitability (ROE) stood at 17.07%, and that, despite falling from 19.61% of 2007.

It is true that interest rates were not negative and that Spain lived in a permanent real estate and citizen party that banks have paid more than.

But Santander never went into crisis and now earns less and is much less profitable.

The case of BBVA, the second Spanish bank by volume of assets and with business as diversified as that of Santander, is very similar.

Last year he earned 3,512 million euros (-35%), with a profitability of 9.9% and a solvency level of 11.65%. Let’s look back.

In 2008, the bank chaired by Francisco Gonzalez, had an attributed profit of 5,020 million euros (-18.1%), with the profitability of 21.5% and just a “core capital” of 6.2%.

A fall in benefits within the regulatory framework

Today, about 40% of the benefits are “devoured” by the regulatory framework of the supervisors.

María Dolores Dancausa, CEO of Bankinter, the entity with the highest profitability on its own resources in 2019, says that the regulation “is one more tax” that the entities support.

Ana Botín believes it is a huge restriction to the progress of the business.

It is one of those who thinks that the ECB will be more flexible, among other reasons because, in its opinion, “regulatory reasons are criminalizing mergers.”

Bankia, the bank with the most capital of the six listed on the  Ibex  (13.02%), has been waiting for a year what to do with the excess it has, after having committed to the market to return to shareholders, via dividends, 2.5 billion euros in its strategic plan that ends on December 31 next.

To Unicaja and Liberbank, who came to announce the beginning of a merger process that later did not come to fruition in 2019.

The ECB pressured them to strengthen their capital if they wanted their blessing to the operation.

They have closed 2019 with 15.6% and 13.02%, respectively, and now, each one on their side.

They do not know what to do with what they have leftover the level set by the ECB.

All banks expect to close the fringes that remain from Basel III soon to end so many demands

Everyone expects to close the fringes that remain from Basel III to end so many demands and, above all, with so much uncertainty.

Not much is missing, but they are details that weigh on the sector.

The president of the AEB, José María Roldán, knows well what he is talking about. Before arriving at the AEB, he was the General Director of Regulation and Financial Stability of the Bank of Spain.

That is why he dared to say in public that continuing to raise capital requirements may end up restricting credit to businesses and families.

“It tends to lend less” to incur fewer risks because on the volume of these the level of capital is calculated.

These uncertainties are transferred to the Exchange.

Investors interpret increases in capital requirements as a sign that the supervisor sees future risks that are beyond market control.

And of course, the stock price falls. With the Exchange again below 10,000 points, four of the six banks listed on the Ibex have lost value so far this year (Sabadell, Bankia, Bankinter and Caixabank ).

And it already rains on wet. The other two, those in Spain that have less than 20% of their business, remain, for the moment, with slight profits.

The problem is that the market is hardly going to understand, by force of habit, that banks decrease CET 1 capital below 11-12%, to which they have become accustomed.

Although legal requirements are between 8.78% from Caixabank and 9.7% from Santander.