Getting the no-confidence vote over the line may end up being less convoluted for Spain’s new prime minister than achieving policy accommodation with the parties that backed his removal of the Rajoy government. Risks to the banks remain limited.
Winning the no-confidence vote by securing the backing he needed from Basque, Catalan and Valencian regional and pro-independence parties was certainly a piece of slick political manoeuvring on the part of Pedro Sánchez; partnering solely with Unidos Podemos would have left him short of votes.
There will already have been some intense horse-trading around the structure of the new minority socialist-led government; some policy give-and-take will ensue. Whatever happens now, however, will be no Italy moment. Unlike the turmoil driven by populist Eurosceptic rhetoric that sent Italy’s markets into freefall, Spain’s new government will maintain a broadly pro-Europe stance.
Maintaining some semblance of continuity, Sánchez committed to sticking to Rajoy’s budget – which has no doubt already caused friction with Podemos – and expressed interest in kick-starting dialogue with the Catalan regional government.
That helped the transition of power in Madrid occur with minimum drama in financial markets: the IBEX 35 stock index closed higher on the day of the vote, while the share prices of the major banks surged. Any deviation from current economic policy will be intensely scrutinised, however, particularly as Mariano Rajoy’s PP-led government had succeeded in creating some growth momentum, and the clean-up of bank balance sheets had progressed relatively well under his watch.
“Political uncertainty is never welcome as it can lead to higher funding costs for banks if it is protracted. That said, the Spanish banking sector is in a much better place compared to a few years ago, so the risks are limited,” said Marco Troiano, executive director in the financial institutions team at Scope Ratings. “And profitability and asset quality have improved, so the banks can stomach some volatility,” Troiano said.
“Beyond that Santander and BBVA have very diversified franchises. What happens in Spain remains relevant but overall their business model is resilient to local economic and political cycles,” Troiano added. Indeed, only 18% of Santander’s net attributable profits derived from Spain in the first quarter of 2018, for example, while BBVA generated just 26% of its Q1 18 gross income from Spain.
Capital, solvency and asset-quality have improved for most Spanish banks. Higher levels of economic growth and an active secondary market helped push the gross NPL ratio down to 4.4% at the end of 2017 (although it is higher in SME, construction and real-estate segments).
Banking profitability, while better, does remain somewhat constrained, with sector ROE of around 6% in 2017 (excluding Banco Popular Español). As elsewhere in Europe, domestic net interest margins remain under pressure owing to low interest rates
Scope’s sovereign ratings report on Spain, published on 18 May, noted that while Spanish banks’ holdings of Spanish government debt had halved to around 18% of the total since the onset of the ECB bond buying, the end of the public-sector purchase programme is likely herald a strong re-emergence of the bank-sovereign nexus. This is unlikely to pose near-term problems, however.
The end of TLTRO operations will create a less facilitative funding environment though, again, this remains more of a latent than an actual risk as Spanish banks maintain good access to wholesale funding markets.