S&P Global Market Intelligence: Spanish banks cut costs, target fees, as low rates squeeze margins

Spanish bank margins are being squeezed by low interest rates, leading them to cut costs and seek ways to raise fee income.

Only three of Spain’s top 13 banks reported a year-on-year rise in net interest income in the second quarter, and at least seven saw net interest margin fall. Only Banco Bilbao Vizcaya Argentaria SA (BBVA) and Bankinter SA reported double-digit returns on average equity.

The sharp drop in Santander’s second-quarter 2016 performance came as it aims to cut costs by between 3% and 4%, with the closure of some 450 Spanish bank branches and a 10% cut in the corporate center.

Banco Popular Español SA is reducing staff by 20% to reduce costs by 10%. CaixaBank will also cut costs by 1.8% thanks to voluntary redundancies, early retirement and temporary layoffs.

Santander expects further margin compression in Spain and, following the Brexit vote, in the U.K. But the bank reported a 1% rise in lending in Spain quarter on quarter from April to June 2016, and said loan volumes were stabilizing after years of falls. Santander was increasing its customer base in Spain, boosting current accounts and mutual funds, and improving fee income, CEO José Antonio Álvarez said. Floating-rate mortgages, though, were eating into margins.

Meanwhile, Spain’s banking system, which had to be bailed out in 2012, continued to improve its capital levels last year. The country’s leading lenders suffered almost exactly the average capital loss for European banks in the adverse scenario of the European Banking Authority’s recent stress test.

Economic growth, while slowing under the impact of Spanish political uncertainty and knock-on effects of the Brexit shock, is also providing an opportunity for banks to cut their nonperforming assets.