European Banking Authority Alerts to Risks in Brazil, Mexico, and Turkey

RIO DE JANEIRO, BRAZIL – The European Banking Authority (EBA) has completed its examination of the 131 main institutions it controls. It has determined that low profitability remains the sector’s weakness (it stands at seven percent with a ten percent target) and calls for spending cuts.

In relation to the Spanish banking system, the EBA alerted about exposure to emerging economies such as Turkey, Brazil, and Mexico, which may be particularly vulnerable to trade tensions and fluctuations in interest rates on the dollar. Although the EBA, chaired by José Manuel Campa, former director of Santander, does not mention them, the warnings are mainly directed at Santander and BBVA.

Each of these institutions operates in two of the three mentioned countries. In addition to these two banks, only Sabadell is in Mexico, albeit with a smaller presence.

In its last exercise in transparency, the EBA said that at the end of June the exposure of eurozone banks to emerging economies reached €1.24 trillion (US$1.45 trillion), 4.7 percent more than a year ago, with particularly high exposures to China (€231 billion), Brazil (€204 billion) and Mexico (€196 billion).

Of this figure, approximately 70 percent is concentrated by Spanish banks (€471 billion) and British banks (€375 billion). British banks are particularly exposed to China and India.

As the European Authority recalled, exposure to these countries is “highly correlated” with global economic growth, so that events that may affect the world economy, such as trade tensions and fluctuations in dollar interest rates, “make these exposures particularly vulnerable”.

Kutxabank first, Santander last

In relation to the sector in Spain, the EBA details the maximum quality capital ratio (CET1 fully loaded in financial jargon), in which Kutxabank stands out with a solvency index of 16.10 percent. It is the fifth consecutive year that the Basque bank has achieved this position, which contrasts with the low profitability reported by the institution.

Kutxabank said it had improved its sovereign and credit risks “which reflects the strength of Kutxabank’s business model and reinforces its position within the financial system,” said the owner of BBK, Kutxa, and Vital.

Santander ranks last by capital, according to the EBA, with 11.06 percent. Sources at the bank headed by Ana Botín say that its retail and very diversified business model “allows us to operate with lower levels of capital since the model brings stability and predictability in results”. They further state that in hypothetical scenarios of economic crises, the entity “destroys less capital”.

The EBA adds that “the solvency ratios of EU banks have remained stable, while the delinquency ratio has contracted even further. In the midst of low profitability, proactive management of operating expenses is crucial”.

According to these data, the average top-grade capital of European banks as a whole increased from 14.3 percent in June 2018 to 14.4 percent last June, the latest figures analyzed by the banking authority. According to the June analysis, Spanish banks ranked last, with a fully loaded CET1 ratio of 11.46 percent, slightly lower than the 11.57 percent accumulated with the closed balances for 2018, although it improved from the 11.38 percent recorded in 2017.

The banking systems of Bulgaria (11.99 percent), Estonia (12.11 percent), Italy (12.52 percent), Portugal (12.77 percent) and Greece (12.84 percent) are in a margin closer to that of Spain, although in a better position. Banks in Iceland (20.86 percent), Luxembourg (20.36 percent), Malta (18.67 percent) and Slovenia (18.43 percent) are in a more comfortable position.

The banking systems in France (14.56 percent), the United Kingdom (14.38 percent) and Germany (13.97 percent) are in an intermediate position and closer to the Old Continent average.

Profitability drops to seven percent

The Authority notes that the return on own resources for the average European banks “declined slightly from 7.2 percent in 2018 to 7.0 percent in 2019. The deteriorating macroeconomic environment, together with interest rates, and fierce competition from banks and financial technology companies (FinTech) and other financial players, are expected to put further pressure on bank profitability”.

The EBA describes this situation as “a challenging environment,” and states that “the rationalization of operating expenses is probably the main area for improving profitability”.

But there are further challenges for banks. According to the EBA, the increase in money laundering and terrorist financing cases has a high operational risk. Cyberattacks and data breaches are major concerns for banks.

In addition, the occurrence of money laundering scandals may entail legal and reputational costs, states the European Banking Authority.

Source: El Pais