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Ratings 02 Jun 2017

Spanish banks: Moody's foresees improvements in asset quality and stable profitability levels

Moody´s ratings agency has confirmed its stable outlook for the Spanish banking sector. This reflects the agency´s view regarding the evolution of the sector over the next two years. Moody´s believes that GDP growth will allow financial institutions to continue improving their asset quality metrics, although at a slower pace than last year. Likewise, Moody´s expects that the profitability of the banks will be maintained throughout 2017-2018, since lower provisions will compensate for the pressure on margins due to low interest rates.

The ratings agency underscores the efforts Spanish banks have made in recent years to improve their asset quality, clean up their balance sheets, recapitalize and increase provisions. All this has improved their capacity to absorb losses, although Moody´s stresses that the high volume of assets from deferred taxes (which the agency regards as low-quality capital), reduces the sector’s solvency.

As for financing and liquidity, Moody´s predicts stability in the medium term. The contraction in recent years of loan books and the almost unchanged volume of deposits, have allowed for a reduction in the banks’ financing gap (that part of their credit portfolio which is not covered by deposits and must be financed in the markets). Going forward, however, the recovery of credit demand will limit the decline in this gap.

As for wholesale funding, Moody´s stresses that the activity of Spanish banks in the wholesale markets has been softened because of their lower financing requirements, which they have covered in large part by acceding extensively to the low-cost financing offered by the European Central Bank. However, Moody´s expects that market issuance may increase as a result of the application of the EU´s Bank Recovery and Resolution Directive (BRRD) and the requirement to increase own funds and eligible liabilities (MREL), which obliges banks to build a cushion of instruments with loss-absorption capabilities.

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