They really don’t know what they are doing: QE and Spanish banks

I wrote on how negative rates are destroying the Italian banking system (here). Now, there is a new piece by Exane (here, via valueandopportunity) on how negative rates might play out in Spain. Unsurprisingly, the effects are similar.

Just as in Italy, Spanish banks have heavily invested in government bonds in order to benefit from the free central bank put provided by QE and whatever it takes. Just as in Italy, private sector lending has been crowded out (it probably was too high to begin with) and, just as in Italy, the low hanging fruit has been picked, now that Spanish government bonds yield less than the 10 year US treasury.

The report is entertaining to read, but the most interesting information can be found in this table,


It shows what percentage of the respective bank’s profit before tax (PBT) comes from interest payments and capital gains in the sovereign portfolio. The percentage is lowest for Santander (SAN) and BBVA, as they have substantial operations abroad and had not engaged in foolish real estate lending to begin with. Nevertheless, their dependence on income from their sovereign bond portfolio is substantial. For others, the importance of the sovereign book is way higher. For the seven largest Spanish banks, on average, 93 (!!!) percent of pre-tax net income comes from gains and income on their sovereign books.

The report mentions that the average remaining duration of the sovereign book is between 3-4 years, which means that over the next half decade virtually all of the Pre-tax profit in the Spanish banking system will disappear, if interest rates remain where they are.

Macro economists, as employed by central banks, no doubt would answer that this is exactly the purpose: force banks to lend more and help the economy grow out of the high debt (circular reasoning being a requirement for a PhD in this field).

They forget that in order to lend more to the private sector a bank a.) needs equity and b.) needs to find enough suitable costumers.

As for the equity, most of the equity in Spanish banks consists of tax loss carryforwards, i.e. it is not really there and not available to cover losses – and everybody knows that. Everybody who is not a macro economist, that is.

As for the costumers, Spanish banks are losing their best and biggest clients to – you guessed it – the ECB and to the bond market. Ask yourself: why should big Spanish corporates (Initex, Endesa etc.) pay the overhead costs for such unnecessary things as underwriting departments and bank branches, if they can pay near zero in ETF and central bank dominated bond markets?

Answer: they don’t.

Thus Spanish banks are trying to find costumers by tricking Spaniards into credit card debt with opaque zero cost offers. If the only way you hope to grow your loan book profitably, is to screw your costumers, I would say that this is neither the way to grow your economy, nor sustainable.

There is no conspiracy – central banks really do not know what they are doing.



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