Bank of Spain says lower rates to have limited impact on banks’ profitability

MADRID (Reuters) – The negative effect of lower interest rates on Spanish banks’ profitability should be limited and at least partly offset by rising loan volumes, the Bank of Spain said on Tuesday.

Any downward pressure on banks’ margins would be countered, at least in part, by a “more favourable evolution of the volume of activity,” the bank said in its semiannual financial stability report.

Spanish banks benefited when interest rates rose following an inflation hike in 2022 and 2023 by increasing the rates they charged on loans, while limiting the rates they paid on deposits.

That tailwind is now reversing and European lenders are having to adapt to a changing market environment as benchmark interest rates fall.

In the first half of this year, the consolidated net profit at Spanish banks rose 22% year-on-year, boosting their return-on-equity ratio (ROE) by 2.2 percentage points to 13.9%.

Net interest income, earnings on loans minus deposit costs, rose 14.5% year-on-year to June, down from a 27% rise in the first half of 2023.

Banks expect lower borrowing costs will bolster lending activity. Against that backdrop, the stock of loans to the private sector in Spain has returned to an upward trend and grew a seasonally adjusted 0.5% between May and August.

The central bank said the main risk to the banks’ stability was a possible escalation of tensions in the Ukraine and the Middle East as well as the outcome of the U.S. elections because of potential repercussions on trade relations.