Spanish banks continue to focus on cost-cutting as a top priority, with the pandemic and the acceleration of digital banking driving several recently announced cost-cutting initiatives, Fitch Ratings says. These initiatives include branch and staff reductions, some linked to mergers.
We believe there is still scope for Spanish banks to significantly improve the efficiency of their distribution despite substantial streamlining of branch networks in recent years. Spain still has one of the highest ratios of bank branches to population size among western European countries. Cost-cutting programmes add short-term restructuring costs but should lead to structural improvements to support profitability in the longer term.
The latest cost-cutting moves are partly driven by the need to compensate for lower revenues and higher loan impairment charges (LICs) due to the pandemic. Most Spanish banks’ cost-of-risk ratios in 2020 were high compared to those of banks elsewhere in Europe, ranging from 0.8% at CaixaBank to 1.2% at Sabadell.
We expect Spanish banks’ LICs to be lower in 2021 but to remain above pre-pandemic levels, and revenues to remain pressured by persistently low interest rates and subdued credit demand. Our overall outlook for the sector’s earnings and profitability is negative, reflecting the risk that the economic fallout from the pandemic could lead to higher-than-expected impairments on problem assets.
Some of the latest measures include headcount reduction with increased digitalisation and automation. Spanish banks are transitioning from branch distribution to a multi-channel and digital distribution model, balancing the need to maintain branches to serve certain existing customer segments while developing digital channels to meet increasing demand from next-generation customers.
CaixaBank has stepped up its plans to reduce branches and headcount following its recent merger with Bankia. According to local media reports, the bank is set to reduce its number of domestic branches by up to 27% and full-time employees (FTEs)s in Spain (including ex-Bankia staff) by up to 19%.
Sabadell reduced its group headcount by almost 8% (about 1,800 employees) in 1Q21, helped by a voluntary staff exit scheme approved in January 2021 shortly after the bank ceased merger talks with BBVA. Santander announced plans in December 2020 to make 3,600 employees (13% of its domestic workforce) redundant and close more than 1,000 branches.
BBVA recently announced plans to use part of the excess capital generated from the sale of its US subsidiary to reduce its operating expenses in Spain. The bank is negotiating the exit of up to 3,800 FTEs (about 16% of its domestic workforce) and the closure of more than 500 branches (about 20% of its branches in Spain).
Other second-tier banks have also announced ambitious efficiency plans and we expect cost management to remain front and centre for Spanish banks. Improved capital buffers, partly due to a regulatory ban on dividend payments in 2020, should support cost-cutting initiatives by helping to absorb the associated up-front restructuring costs.
