The European Central Bank (ECB) ranks the Spanish banking sector as the second most profitable in the European Union, but as the worst in terms of capital ratios.
The sector is dominated by four large banks in terms of total assets (Santander, BBVA, Caixabank and Banco Sabadell), after the completion of the final stage of consolidation of the sector following the complete integrations of Bankia (indirectly controlled by the Spanish State) into Caixabank and Liberbank into Unicaja during 2022.
After almost 15 years of financial land operational adjustments, the rise in interest rates that began in 2022, and the subsequent increase in financial margins, has allowed Spanish banks to obtain and generate significant profits and capital gains for their shareholders, after having overcome the crisis derived from the covid-19 pandemic with robust capital levels and despite the impact of the invasion of Ukraine by Russia.
The increase in interest rates has allowed Spanish banks to overcome the most important challenge they have been facing in the latest years: the low profitability caused by long-lasting extraordinarily low interest rates. Although this trend of increase in profits and margins is expected to continue during 2023, Spanish banks must keep a close eye on the impact that a potential lower demand for financing gand a higher delinquency in this context of rising interest rates.
Another challenge for Spanish banks is the need to adapt to the current environment of high digitalisation, accelerated after the covid-19 pandemic. Although Spanish banks have significantly reduced their operational size –in particular, their extensive branch footprint– to keep up with an increasingly digital business, their level of investment in technology still shows a gap with respect to other European banks. Improving their competitiveness in this area is crucial for the main Spanish banks in light of the growth of neobanks, crowdfunding platforms and other Fintech entities, as well as the increase in fraud risks.
In addition, Spanish institutions have to face the implementation of global financial regulation that has been delayed during the covid-19 pandemic: Basel III, as well as the new requirements to consider environmental, social and governance (ESG) factors and criteria in their policies of non-financial risk management.
See complete chapter at: The Banking Regulation Review, Fourteenth Edition. The Law Reviews, April 2023.