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THE RECOVERY OF THE SPANISH ECONOMY AND RECENT
DEVELOPMENTS OF THE BANKING SYSTEM
Fernando Restoy
Deputy Governor, Banco de España
CENTRAL BANKS SEMINAR, CRÉDIT AGRICOLE
Madrid
26 October 2016
OUTLINE
22
The recovery of the Spanish economy and its drivers
The banking sector2
1
2.1 Challenges
2.2 Possible responses
3
1. A SUSTAINED RECOVERY
SPAIN EURO AREA
• The Spanish economy has completed three years of sustained expansion,
with growth in activity and employment above that of its euro area partners.
• Price increases have been more moderate than in the whole euro area,
allowing for sizeable competitiveness (re)gains.
SOURCES: INE and Eurostat.
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
0,8
1,0
1,2
2013 2014 2015 2016
GDP(q-o-q growth rate)
%
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2013 2014 2015 2016
EMPLOYMENT(q-o-q growth rate)
%
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
2013 2014 2015 2016
Headline inflation rate (HICP)(y-o-y growth rate)
%
4
1. STRUCTURAL FACTORS BEHIND THE RECOVERY: COMPETITIVENESS GAINS IN LABOUR AND FINANCIAL COSTS…
• On top of some temporary elements, the recovery is explained by several
factors of a more permanent nature.
• Particularly relevant is the improvement in competitiveness, both in terms of
relative labour costs and in terms of relative financing conditions.
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
2012 2013 2014 2015 2016
LOANS TO NON-FINANCIAL CORPORATIONS. LOANS < € 1m. SPAIN
LOANS TO NON-FINANCIAL CORPORATIONS. LOANS < € 1m. Core euro area
LENDING RATES. NON-FINANCIAL CORPORATIONS
%
SOURCES: INE, Eurostat, ECB and Banco de España.
(p) Projections of BdE and ECB.
90
95
100
105
110
115
120
2000 2002 2004 2006 2008 2010 2012 2014 2016 (p)
ULCs COMPENSATION PER EMPLOYEE PRODUCTIVITY PER EMPLOYEE
UNIT LABOUR COSTS IN SPAIN RELATIVE TO THE EURO AREA
2000 = 100
5
…THAT ARE LARGELY ATTRIBUTABLE TO RECENT REFORMS IN THE LABOUR MARKET AND THE FINANCIAL SECTOR
• The 2012 labour market reform opened new venues of internal flexibility for firms,
favouring wage moderation and supporting the recovery of employment.
• The 2012-2013 financial sector reform (balance-sheet cleaning, recapitalisation,
restructuring) contributed to a significant reduction in the banks’ cost of funding, that
they passed-through to lending rates.
0
2
4
6
8
10
12
2012 2013 2014 2015 2016
BANK SENIOR BONDS. YIELDS
SPAIN ITALY CORE EURO AREA
%
Source: Eurosystem Wage Dynamics Network Survey, 3rd wave.
Non-financial Spanish firms’ perceptions about the possibilities to adjust wages in 2013 with respect to 2010
%
Sources: Bloomberg, ECB and Banco de España
1. THE OUTLOOK
6
Projections (September 2016)
2015 2016 2017 2018
GDP 3.2 3.2 2.3 2.1Employment 3.0 2.9 2.0 1.8Inflation (CPI) -0.5 -0.3 1.5 1.6
• The expansionary phase will extend into the medium term albeit at a somewhat lower pace.
• Growth will continue to be employment-intensive and job creation will provide for further
reductions in the unemployment rate.
• GDP level pre-crisis will be achieved along 2017, but the fall in employment will be more
persistent.
SPAIN EURO AREA
85
90
95
100
105
110
2008 2010 2012 2014 2016 2018
REAL GDP2008Q2 = 100
75
80
85
90
95
100
105
110
2008 2010 2012 2014 2016 2018
EMPLOYMENT2008Q2 = 100
SOURCES: Eurostat, ECB, INE and Banco de España.
1. RISKS TO THE BASELINE AND CHALLENGES
7
Risks surrounding GDP projections: tilted to the downside
• External risks: associated with global developments: some emerging markets,
worldwide political tensions, uncertainty over the UK’s exit from the EU.
• Internal risks: uncertainty over the future course of economic policies in relation
both to the process of fiscal consolidation and to economic reforms.
Despite the progress made in the correction of imbalances, significant
challenges remain in place:
• Reducing still very high unemployment to acceptable levels
• Resuming fiscal consolidation
• Improving productivity growth
• Reducing the relatively high needs of external financing
OUTLINE
88
The recovery of the Spanish economy and its drivers
The banking sector2
1
2.1 Challenges
2.2 Possible responses
2. BANKING SECTOR: WHERE DO WE STAND?
99
• Efforts from regulators, supervisors and banks have materialised in an
improvement in capital positions: CET1 ratios have increased in practically all
European countries.
• Spanish banks show an increase similar to the EU average. In this case, the
evolution of RWA has not contributed to the increase.
• In addition, in Spain, there has been a big effort in balance sheet clean-up
(provisions) of approximately 300,000 mill.€ since 2008.
SOURCE: European Banking Authority.a The comparison is made for institutions that participated in the 2016 ST (except from Hungary), taking the data for these same institutions in the 2014 ST, and clustering by country. The orange diamond shows, for each country, the total change in the CET1 ratio from December 2013 to December 2015. Theblue and dark red bars show the portion of this change attributable to changes in CET1 capital and in RWAs, respectively. Positive bars denote an inter-period increase in CET1 capital and an inter-period reduction in RWAs, changes that would result in an increase in the CET1 ratio.
-2
-1
0
1
2
3
4
SE FI NO UK DK NL BE EU ES FR AT IT DE IE PL
CHANGE DUE TO RWA CHANGE DUE TO CET1 CHANGE IN THE CET1 RATIO
PERCENTAGE POINTS CHANGE IN CET1 RATIO BETWEEN DECEMBER 2013 AND DECEMBER 2015 (a)
%
10
2.1 CHALLENGES - PROFITABILITY
• ROE for Spanish banks of 6,8%, slightly above the SSM average.
• Low interest rates, uncertain macroeconomic developments and high NPL
levels weigh down on it and, in turn, on investors expectations (reductions of the
price-to-book value ratios).
• Although clearly below 1, Spain continues having a relatively better price-to-
book ratio than European peers.
SOURCE: European Banking Authority.Risk Dashboard June 2016 (198 entities)
SOURCE: Datastream.
ROE. EUROPEAN COMPARISON. JUNE 2016
0
2
4
6
8
10
12
IE BE AT NL FR ES SSMav.
EUav.
UK DE IT
%
0.00.10.20.30.40.50.60.70.80.9
31-Dec-15 25-Oct-16
SPAIN ITALY FRANCE GERMANY EURO AREA EUROPE
PRICE-TO-BOOK-VALUE RATIO OF THE BANKING SECTOR
11
2.1 CHALLENGES - NPL
• NPLs are still high… but decreasing (at a pace of approximately 9% in the euro area and 18% in Spain, y-o-y rates)
SOURCE: European Banking AuthorityRisk Dashboard June 2016 (198 entities).
-8-6-4-202468
-20
-10
0
10
20
IT IE SSMaverage
AT ES EUaverage
FR BE NL DE
JUNE 2016 PP CHANGE: JUNE 2016 / JUNE 2015 (Right-hand scale)
EU NPL RATIOS. June 2016
pp%
47 47
12
2.1 CHALLENGES - REGULATION
i) BCBS agenda: the challenge of improving risk measurement withoutsignificantly increasing capital requirements.
ii) MREL: it is likely to be a bindingrestriction for non-listed medium sizebanks.
Regulation
0%
10%
20%
30%
40%
50%
60%
70%
DE ES FR IT NL UK TOTAL
CORPORATE PORTFOLIO SUBJECT TO IRB. RWA DENSITY
December 2015
SOURCE: EBA, Stress Test 2016 (51 entities).
OTHER
NON-SSM PARENT
STATE OWNED
COOP. AND SAV. BANKS
LISTED
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
SSM SIGNIFICANT INSTITUTIONS BY OWNERSHIP STRUCTURE (JUNE 2016)
SOURCE: Banco de España
• 60% have not issued any AT1 instrument (e.g. convertible bonds)
• 21% have not issued any T2 instrument(e.g. subordinated debt)
13
2.2 POSSIBLE RESPONSES: EFFICIENCY
• Cost-to-income ratios have beenrelatively stable over the last years. Thereappears to be room for improvement.
• New technological developments shouldallow further gains in efficiency. Proximity to customers is less dependent on face-to-facecontact.
SOURCE: SNL. Significant institutions on which data are available each year; in the case of UK, the 5 biggest banks, in terms of total assets.
SOURCE: ECB (Structural Indicators), World Bank and Eurostat. a Data refer to 2014.
0
10
20
30
40
50
60
70
80
90
SPAIN SSM ITALY FRANCE UK GERMANY
2012 2013 2014 2015
COST-TO-INCOME
0.00
0.20
0.40
0.60
0.80
1.00
1.20
FRANCE GERMANY ITALY SPAIN UK (a) TOTALEUROAREA
2007 2011 2015
NUMBER OF OFFICES PER ONE THOUSAND INHABITANTS
14
• Room to improve fee income.
• Fintech is a challenge but also an opportunity for banks.
2.2 POSSIBLE RESPONSES: NEW PRODUCTS AND SERVICES
SOURCES: SNL (significant institutions on which data are available each year; in the case of UK, the 5 biggest entities, in terms of total assets) and Banco de España.
0
5
10
15
20
25
30
35
40
SPAIN SPAIN(Business in
Spain)
GERMANY ITALY FRANCE SSM UK
2013 2014 2015
NET FEE INCOME TO TOTAL OPERATING INCOME%
15
• The need to continue reducing costs will encourage mergers and acquisitions withineach country.
• In accordance with the HHI index, there seems to be room for consolidation in thelargest European countries.
• In any case, what is desirable is to have cross-border mergers and truly pan-European banks.
2.2 POSSIBLE RESPONSES: CONSOLIDATION
SOURCE: ECB (Structural Indicators)The euro area average is calculated as the average of the Herfindahl-Hirschman indices of each of the euro area countries, weighted by their total assets
0
500
1,000
1,500
2,000
2,500
3,000
DE AT UK IT FR IE Euroarea
average
ES BE PT NL GR FI
HERFINDAHL-HIRSCHMAN INDEXDecember 2015
Low concentration
Moderate concentration
High concentration