The end of free money returns banks to profitability but the sector still does not recover its reputation

• Turning point (V) Self-employed and SMEs, without a cushion for a new crisis

Banco Santander gave the bell in 2021 with an advertising campaign that made its catchy slogan get into the head of anyone who came across it.

was recognized among marketing professionals as one of the best actions of the year.

However, it didn't take a big agency or a big bank for another, no less catchy slogan to take the throne and headlines from him:

Behind him was Carlos San Juan, a 78-year-old Valencian retiree who inadvertently led a protest against the financial exclusion of older people.

Both campaigns illustrate the dichotomy facing the Spanish financial sector now that the

has started to raise rates and the era of free money is over.

And the fact is that of all the battles that banks have ahead of them -default, mortgages, credits, branches...-, the most difficult, along with profitability, is the one that they will have to fight to win over public opinion and recover the customer trust.

"Reputation is not earned with a marketing plan, reputation is earned on a day-to-day basis, and what people have seen for a long time is that they do not have face-to-face attention at their bank and that they are not happy with the service they receive. dan", explains

economist and financial analyst.

In his opinion, the image of banks in the medium and long term is closely related to the reinvention of their business models and the need to establish coherence between the way they earn money, the service they offer and the message they throw.

"The battle of public opinion is very lost and it is worth nothing to be

on social networks or carry out striking advertising campaigns if they are not accompanied by something else.

perceive coherence between the positioning corporate and the real business, and receive good service," lists Santacruz.

Carlos San Juan's campaign revealed that there is a part of society that feels isolated by financial institutions.

On that occasion the focus was on the elderly, but they are not the only ones.

Many areas of the country do not have bank offices or direct attention and fear being financially isolated from the rest because digitization is not always the solution nor is it within everyone's reach.

Many people still have the feeling that it is not enough and that the banks have an outstanding account with society.

The financial crisis of 2008 has a lot to do with that perception.

The entities were behind a large part of the thousands of evictions that took place in those years;

of the

in which many people were trapped.

In addition, several boxes and entities had to be rescued with public money and the bill is still computed in the State accounts.

So as much as the sector tries, it has not been able to remove the stigma that it has dragged on since then.

"Winning that battle for public opinion is even more complicated if the government has positioned itself against it and places you as the scapegoat for a specific situation," says Santacruz.

He thus refers to the measure presented by Moncloa as part of his package against inflation.

The Executive will apply a rate of 4.8% on the interest and net commissions of financial entities with income of more than 800 million euros during the next two years.

The sector feels, once again, singled out.

Fusions and acquisitions

dropdown

Financial institutions have found two ways to reduce costs and maintain profitability in recent years in branch closures and downsizing.

Far from having finished with the adjustments, the large Spanish banks continued to reduce their branch network in the first half of the year, with a cut in branches of 9% compared to December, and 4.7% in terms of their number of workers, according to the data published in the half-yearly reports and compiled by Europa Press.

At the end of June, the branch network was made up of 10,765 branches and the workforce totaled 119,425 employees in Spain.

In 2021, adjustments skyrocketed as a result of two major mergers in the sector.

On the one hand, the integration of Bankia into CaixaBank and, on the other, that of Liberbank into Unicaja Banco, so that the entities resulting from the process decided to reduce their staff and the number of branches in order to avoid having oversized equipment and networks. .

For this year, analysts do not rule out new operations aimed at reinforcing the Spanish banking scene and sizing it up to compete on the European financial board.

“I have no doubt that we are going to see operations this year.

They are an apparent source of profitability.

It is time for small and medium banks.

We are moving towards a banking system that is highly concentrated in six or seven large entities”, comments the economist Javier Santacruz.

new tax

The CEO of Banco Santander,

warned about the "stigmatization" that the rate implies and the employer warned about its effects on the granting of credit and the activity of the entities.

However, experts downplay the magnitude of the impact.

"The main victim is the shareholder, since by having to pay an additional tax, the banks have less cash available at the end of the year, which means a lower dividend and a lower repurchase of shares," says

, director of the Signature

For the

rating agency , the measure "reduces flexibility" from entities to face an "uncertain" environment, and

, associate director of financial institutions at

, also agrees with this line .

"This new tax will slow down the expected improvement in profitability," she points out, although she rules out "that the large Spanish banking groups radically change their forecasts because of the rate."

The sources consulted agree that it will be difficult to control that the entities do not transfer this tax to final consumers, but they rule out that the stability of the sector is at risk.

"

The banks have warned us of the arrival of an apocalypse due to the tax, but if they complied with the reduction of credits as they have said, they would go against their own business. They cannot stop lending money, that is why their speech is irresponsible," says

, president of the Association of Financial Users (

).

Cost effectiveness

So once the impact of the tax is calibrated, the other focus of the sector along with reputation is

.

The years of interest rates at historic lows have played against the banks in this regard.

Their business has been diminished and now, with the withdrawal of stimuli by the ECB, they glimpsed before them the possibility of recovering part of the lost ground.

However, inflation, the war in Ukraine and global economic instability introduce new elements of uncertainty that cast doubt on this improvement.

"The ECB's interest rate decision marks an acceleration in the appreciation of European banks' balance sheets and should be clearly positive after 10 years of falling and negative rates, but higher rates with lower lending volumes are not they will put an end to the profitability problems of the entities", explains

, deputy director of financial institutions at Scope Ratings, in a recent commentary by the rating firm.

"The profitability challenge will be compounded by rising operating costs [due to wage increases] and higher cost of risk, as tighter financial conditions lead to higher non-performing loans. This explains why valuations of Spanish banks continue to be lower than the book value of many European banks," adds Hardy.

According to DBRS Morningstar calculations, the profitability of Spanish banks until June, measured through ROE, stood at 10%, above the levels recorded before the pandemic.

Its analysts point out that

in relation to higher interest margins, and

, related to a possible economic deterioration due to high inflation, have not yet materialized."

The outlook for the second half of the year is positive, but the risks are on the horizon and consumers are becoming increasingly aware of them.

Less credit and more expensive

In fact, customers had already been noticing a rise in interest rates on their loans even before the ECB officially raised them.

,

in

recent months.

The Bank of Spain foresees that the entities will continue transferring the rise in rates to the cost of the loans of families and companies, therefore, the credits will become more expensive.

He also hopes that financial entities, competing for fundraising, will begin to increase the remuneration of deposits.

"We will see an asymmetric reaction in which the big banks will take longer to raise the price of loans, both due to commercial policy and economic uncertainty. They have more muscle to maintain low prices and retain customers," predicts Javier Santacruz.

With regard to deposits, he does not expect them to take effect for another year, which is why he considers it "quite difficult" for the

to take place in the short term.

Another thing different is the economic uncertainty, which can make the granting of credit more complicated and harder.

In this sense, the supervisor hopes that the conditions will tighten in an attempt to build a

.

In the sector they have been saying for some time that they learned the lesson of 2008 and the examination of borrowers is now much more rigorous, but even so, no one loses sight of the decline in purchasing power of families and, above all, the situation of many companies that after the pandemic

.

"Many companies have not recovered and will have to face the expiration of ICO credits, which can put their viability at risk and, by extension, that of the entities," says Patricia Suárez, from Asufin.

Conforms to The Trust Project criteria

Know more

• Bank fees