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Report BFA - Bankia 2014 / Economic and financial environment

  • GDP
  • Inflation
  • House prices 
  • Mortgages arranged 
  • New credit 
    €210 Bn
  • Job creation (LFS)

The spanish economy continued to bounce back in 2014, sustaining the trend beginning midway through last year.

The performance of the world economy was somewhat disappointing. Growth rates remained below their potential for the third year running, primarily reflecting the significantly weak performance in the second and third quarters of the year of the eurozone (practically stagnant) and Japan (in a recession). On a positive note, the US once again shone, coming through a bad patch at the start of the year and quickly returning to decent rates of growth. The situation in Europe – the Russia-Ukraine conflict and unacceptably low inflation close to zero, gave rise to further uncertainty – remained fragile and highly uneven. The UK and a number of peripheral countries such as Ireland and Spain appear to have secured relatively robust growth rates, while Germany showed signs of weakness, France ended the year with practically no growth, and Italy’s economy contracted (for the third year in succession).

On the whole, the emerging economies enjoyed similar growth rates to developed economies, although they continue to slow down due to the accumulation of specific weaknesses and external factors that have traditionally been unfavourable: expected interest-rate rises in the US in 2015, a strengthening US dollar, and a sharp drop in the prices of some raw materials (especially oil), which fell by close to 40% in the second half of the year. The lower rate of growth in China is a concern, and above all, the crisis in Russia.

Against this backdrop, the main central banks continued with diverging monetary policies, albeit on a prudential basis. Given the fragile situation vis-à-vis growth and inflation, the ECB cut its benchmark rate by 10 basis points in June and September to 0.05%. Consequently, surplus liquidity held by banks at the ECB became a cost, as the rate on deposit facilities moved into negative territory. It also carried out a raft of liquidity-providing operations conditional upon an increase in credit and bond purchases and securitisation, in order to grow its balance sheet by around 1 billion euros over two years. The Bank of Japan also increased its stimulus measures, setting a target of expanding the monetary base at an annual pace of 80 billion yen. In contrast, the Fed reduced its bond purchases, bringing them to an end in October, while forecasts now focus on when it will carry out its first interest rate hike.

This combination of abnormally low interest rates and a very subdued outlook is having a positive impact on public debt. Specifically, Spain’s ten-year bond yield has hit an all-time low (below 2%), and its risk premium neared 1% at the end of 2014.

The economic outlook for 2015 is positive. Estimated growth rates for the global economy are the highest since 2011, and it is expected that the upturn will be more pronounced in developed economies than in the emerging economies. The EMU will continue to post moderate growth, probably at a rate of approximately 1.5%, after only 0.9% in 2014. However, risks appear to be more balanced. Structural weaknesses in France and Italy, the withdrawal of Greece’s bailout, and greater political uncertainty in Southern European countries are all a concern, although the EMU will benefit from being unshackled from the weight of fiscal consolidation, the ECB showing a greater commitment to growth and taking a proactive approach to mitigating the risk of deflation (it began ramping up its bond purchase programme at the start of 2015, including public debt), and above all, a weaker euro and lower oil prices. The leaning towards an expansionary monetary policy in the EMU will contrast with the start of the Fed raising interest rates.

Spanish economy

The Spanish economy continued to bounce back in 2014, sustaining the trend beginning midway through last year. After six quarterly rises, the GDP growth rate hit 1.4% for the whole year; the first positive figure since 2008 and bucking the negative trend in the previous year (-1.2%). This upturn in activity, which also boosted jobs, came against a backdrop of improved terms of finance, thanks to market confidence picking up and progress made cleaning up the banking system.

As the economy rebounded, domestic demand-driven growth also returned; contributing to the growth in GDP for the first time since 2007. Driven by heightened confidence in the job market, household spending picked up dramatically, even outstripping household income, whereby savings tailed off and fell to their lowest level since the end of 2012. On the other hand, businesses ramped up investments in a favourable environment, characterised by strong demand, improved outlooks, higher profits and access to credit, and the rise in industrial production capacity. The pegging back of the construction sector came to an end, whereby it no longer contributed negatively to GDP in quarter-on-quarter terms. The contribution of foreign demand to growth fell progressively due to the uptick in imports and driven by the increase in consumption and investment. Nevertheless, heightened competitiveness stemming from the depreciation of the euro and resistance of exports should be viewed positively, reflecting the effort made to raise the competitiveness and diversify the export base.

The housing market should signs of slowly reawakening after the major decline in prices and volume. Demand began to pick up, primarily driven by the second-hand housing segment. Foreign investor interest continued to be the market’s driving force. Moreover, the mortgage loan market showed a slight recovery in the second half of the year, which could indicate a gradual upturn in domestic demand in the market.

For the first time, annual inflation was negative in 2014, protecting household purchasing power.

Overall, the downward trend in prices is levelling off, whereby the total drop in 2014 was the lowest since the start of the crisis. That said, performance varied geographically, with some autonomous communities already rebounding from the lows reached, while others are still seeing prices falling due to a slower recovery or more severe downturn.

The Spanish economy generated financing capacity in 2014 for the third year in a row, although to a lesser extent that in 2013 because of the uptick in domestic demand and subsequent drop in savings. Inflation, meanwhile, was negative for the first time at year end, chiefly as a result of the sharp fall in energy prices during the latter part of the year. Although this deflationary trend has put the brakes on public and private deleveraging, it has also protected household purchasing power, offsetting the drop in wages.

While some risks became more exacerbated during the second half of 2014, such as lower than expected EMU growth, slower emerging market growth or certain events creating political uncertainty, they were offset by new market drivers; especially the significant decline in oil prices and sharp euro depreciation. It is therefore expected that the recovery will be more pronounced in 2015 and GDP will grow by over 2.5%, provided no risks arise and favourable financing terms continue. Household disposable income will rise thanks to cheaper fuel prices and tax cuts. Exports will also pick up off the back of a weaker euro.

Banking environment

The economic situation affected activity in the banking sector, which enjoyed a gradual improvement in its fundamentals during 2014, while confidence in the sector’s robustness grew, spurred by the positive results of the European Central Bank’s comprehensive assessment. Nevertheless, significant challenges lie ahead for banks, operating in an environment of low interest rates, persistent modest growth forecasts, and increasing regulatory requirements.

The necessary process of reducing debt in the Spanish economy continued during the year; the private sector credit-to-GDP ratio of which remains above the EMU average. As a result of this process, private credit once again fell, ending the year down 7%, although the fall was slower in the second half of the year. A factor in this was the release of new credit for households and SMEs which amounted to around 210 billion euros by December; 11.4% higher year on year. Another key factor was a halting of the decline in credit quality, reducing the balance of non-performing loans for the first time since the beginning of the crisis and bringing down the NPL ratio to less than 13% – albeit still a record high. Improved funding terms enabled institutions to reduce their reliance on the European Central Bank. Meanwhile, retail customer deposits gained ground as a percentage of total liabilities, despite savings being steered toward products less affected by the prevailing very low interest rates such as investment funds. The movements in lending and deposits both helped progress with recomposing the institutions’ balance sheets.

With regards to restructuring, sector consolidation was given a boost through transactions involving national and foreign groups including the acquisition of NCG Banco by the Venezuelan group, Banesco, Catalunya Banc by BBVA, and the takeover of Banco CEISS by Unicaja. In February, BFA also sold 7.5% of Bankia’s capital for 1.3 billion euros. Resource optimisation continued during the year with new workforce and branch restructuring, which have been cut by 25% and 30%, respectively, since their peak in 2008.

Balance sheets were shored up during the year off the back of the entry into force of the European Union’s new prudential solvency regulation based on Basel III, establishing capital requirements that enable institutions to better absorb losses. Institutions responded to the new requirements by boosting levels of higher quality own funds. As a result, the Tier 1 common capital ratio (CET 1) for the entire sector stood above the minimum stipulated for the transition period (4.5%).

The sustained effort to bolster solvency and clean-ups over the last few years were proven to be worthwhile by the satisfactory results of the European Central Bank’s comprehensive assessment published in October. This assessment was one aspect of the preparations for the European Single Supervisory Mechanism, headed up by the European Central Bank, which assumed full powers on 4 November to supervise European banks – the first milestone towards the Banking Union. This exercise involved assessing the quality of the balance sheets of the European Union’s largest banks and their ability to absorb losses in an adverse scenario. The Spanish banking sector’s results were highly satisfactory, demonstrating they boast clean balance sheets, which adequately reflects the banks’ circumstances and robust solvency position.


The albeit nascent improvements in the banking sector have had an income statement impact in the form of lower operating expenses and risk premium. This has countered the limited capacity to generate recurring income given current levels of activity and interest rates. As a result, profitability ratios recovered slightly.

Over the coming months, profitability will remain one of the sector’s main challenges, along with the need to adapt to regulatory developments. At a European level, the institutional framework for the Banking Union will continue being built, organised around the Single Supervisory Mechanism already operational, and the Single Resolution Mechanism, which will come into operation in 2015. Internationally, a debate is under way regarding new requirements to enhance banks’ ability to absorb losses in the event of resolution, which would include debt instruments. In this context, the efficiency gains and increased productivity achieved during the restructuring phase will represent a significant comparative advantage vis-à-vis profitability.