BTN News: The European Central Bank (ECB) recently increased interest rates, marking a pivotal moment in the history of European banking. For six long years, banks struggled with zero returns, minimal income, and market valuations far below their book values. However, this new monetary policy has been a lifeline for the banking sector, transforming it from an investor deterrent to one of Europe’s most attractive industries.
A Transformative Shift
During the COVID-19 pandemic, Spanish banks suffered massive losses, a continuation of the financial difficulties caused by six years of zero and negative interest rates. Traditional banking relies on lending money and earning interest from borrowers, but with interest rates at historic lows, banks found it challenging to generate income. The zero-interest environment forced banks to focus on value-added services, commission-generating products, and cost-cutting measures to stay afloat.
Alfredo Jiménez, Secretary General of the Spanish Institute of Analysts, noted, “These years of zero interest rates posed a significant challenge for banks, which had limited options to protect their profitability beyond enhancing value-added services, distributing more off-balance-sheet products, seeking efficiencies, and cutting costs.”
The Impact of Rising Interest Rates
With inflation surging, the ECB took decisive action, raising interest rates from 0% to 4.5% in just a year and a half. This dramatic increase provided banks with an almost immediate cash infusion, leading to record-breaking profits and the highest market valuations in years. Santander, for instance, reported record profits for two consecutive years, earning €9.6 billion in 2022 and €11.1 billion in 2023. Similarly, BBVA achieved a historic profit of €8 billion in 2023, while Sabadell, Bankinter, and CaixaBank also reported significant gains.
Spanish banks have now become the most profitable in Europe. Return on tangible equity (ROTE) figures, which were previously below 10% and insufficient to cover capital costs, have surged past double digits. Bankinter leads with a ROTE of 18.4%, followed by BBVA at 17.7%, CaixaBank at 15.8%, and Santander at 14.9%, all significantly outperforming their European counterparts.
Jiménez highlighted, “The average return on equity was 10.2% in 2022 and 13% in 2023, compared to just 5% over the previous four years. This improvement is indicative of the current situation. However, despite the improved profitability, the gap between return on equity and the cost of capital remains narrow, so banks must continue implementing strategies to enhance their profitability.”
The Banking Sector’s Resurgence on the IBEX 35
For a long time, banks traded on the stock market below their book value, a trend that persisted from 2016 to 2022. Investors saw little reason to invest in a sector that struggled to achieve profitability. However, the recent monetary policy shift has led to a rally in banking stocks, doubling and even tripling their market value. Two years ago, banks accounted for 22% of the IBEX 35, but they now represent over 30%, even though not all trade at their book value.
Felipe Herranz, a member of the Madrid Economists’ Association, remarked, “This is an important milestone for the banking sector. The goal isn’t always to deliver record results but to achieve sustainable profitability over time.”
Sabadell has seen the most remarkable recovery, with its stock price skyrocketing by 209% since July 2022. Under the leadership of César González-Bueno, Sabadell simplified its operations, continually exceeding its forecasts and increasing its payouts and dividends. Analysts still see a potential 7.7% upside for the bank.
BBVA has more than doubled its market value, with shares up 139% over the past two years. Despite a slowdown following its bid for Sabadell, analysts predict a further 16% increase. CaixaBank, strengthened by its merger with Bankia, has nearly doubled its stock value, gaining 92% and recovering its book value. Bloomberg analysts forecast a 10% potential upside for CaixaBank.
Santander’s shares have risen 85% over two years, aligning its market value with BNP Paribas, making it the most valuable European bank. The bank’s new structure focuses on business lines rather than geographic markets, aiming for the market to value its operational performance rather than its exposure to various countries’ economic conditions. Analysts see a 24% potential upside for Santander.
Bankinter’s shares have increased by 69%. Although not reaching triple digits, Bankinter has maintained profitability above 10% and traded above book value even during zero interest rates. Bloomberg analysts project a 5% potential upside for Bankinter.
Unicaja, while not performing as well as its peers due to internal conflicts following its merger with Liberbank and an extraordinary banking tax, has still seen a 61% increase in share value over the past two years, moving from the continuous market to the IBEX 35.
Conclusion: A Promising Future
“The economic situation and good bank management have coincided. In 2023, Silicon Valley Bank failed under similar conditions. However, current banking profits are strong, having adopted stringent standards. Investors should recognize that banks are delivering record profits after passing rigorous regulations and have the potential to exceed their book values,” Herranz concluded.
The ECB’s interest rate hike has undeniably transformed the European banking landscape, turning financial struggles into opportunities for growth and profitability. As Spanish banks continue to adapt and thrive in this new environment, they remain poised for sustained success and increased investor confidence.
