The negative effect of lower interest rates on the profitability of Spanish banks should be limited and compensated, at least in part, due to the increase in the volume of loans, the Bank of Spain said on Tuesday.
Any downward pressure on banks’ margins would be offset, at least in part, due to a more favorable evolution of the volume of activitythe bank said in its semiannual financial stability report.
Spanish banks benefited when interest rates rose as a result of rising inflation in 2022 and 2023, since financial institutions increased the rates they charged for loans and limited what they paid for deposits.
That tailwind is now reversing and European banks have to adapt to a changing market environment as benchmark interest rates fall.
In the first half of this year, the consolidated net profit of Spanish banks increased 22% year-on-year, which raised its return on equity ratio (ROE) by 2.2 percentage points, to 13.9%.
The interest margin, that is, the profits on loans minus the costs of deposits, increased 14.5% year-on-year through June, below the 27% increase recorded in the first half of 2023.
Banks hope that lower borrowing costs will boost lending activity. In this context, The volume of loans to the private sector in Spain has resumed an upward trend and grew 0.5% seasonally adjusted between May and August.
The central bank said the main risk to banks’ stability was a possible escalation of tensions in Ukraine and the Middle East. as well as the result of the elections in the United States due to the possible repercussions on trade relations.
