Spanish banks increased their exposure to sovereign debt by 20% in 2022, in line with the European average

The change in monetary policy since last summer has meant a before and after for banks. It has boosted the purely banking business and, with a market flooded with liquidity, has allowed entities to increase their commitment to public debt by almost 20%: 53,450 million more to obtain yields. However, there is a part of the sovereign portfolio that suffers, the one that was bought at a lower interest and has been recorded at amortized cost (it is devalued as the price of money rises). If they had to get rid of these assets, Spanish entities would suffer a deterioration in their accounts of about 15,000 million, according to calculations by PwC and Alantra. Despite this, banks have a comfortable liquidity position, so the possibility that they have to get rid of these assets before maturity seems remote, since they only represent around 13% of the total. In other words, its impact on results and capital would not materialize, thanks also to the thick mattresses that have been built due to the demands of the regulators.

“The weight that public debt has on the balance sheet of Spanish banks has nothing to do with that of Silicon Valley Bank: in June 2022 it was 13.2%, according to data from the European Banking Authority (EBA, for its acronym in English)”, explains Joaquín Maudos, deputy director of the IVIE and professor at the University of Valencia. This is in line with the European average, which is close to 12%. The EBA estimates the total exposure of Spanish entities to fixed income at around 500,000 million last June on almost 3.8 trillion assets.

The first thing to understand is how these investments work. On the one hand, there are the bonds that are included as fair value: they fluctuate as interest rates rise and fall. Thus, if there is a rise in rates, those bonds recorded as fair value will have to depreciate (they lose value as there is debt that pays a higher yield), while if there is a drop in the price of money, they will appreciate. On the other hand, there are those that are counted as portfolios at amortized cost: those that banks have on their balance sheets until maturity, with no forecast that they will be sold, so their value does not change despite fluctuations in interest rates. interest.

In addition, it must be taken into account that this exposure of banks to public debt in Spain and Europe is a complement for entities (in the case of Silicon Valley Bank, for example, fixed income accounted for 55% of its assets). And its use, if it is controlled, has advantages. “Sovereign bonds are used for various reasons, firstly, because they are instruments of very high credit quality that also do not consume regulatory capital due to credit risk and, depending on their accounting, they do not have market accounting,” explains Enrique Reina, a partner in the area. banking at the consulting firm Accuracy.

In this way, the sector has taken advantage of a favorable environment, in which profitability was rising for a very safe asset (it is the State that supports the bond). “They have taken advantage of the rise in rates to buy. Three things come together: very high returns, a lot of liquidity and little demand for credit, below the deposits that banks have”, sums up Ángel Berges, vice president of International Financial Analysts (AFI). In other words, the bank has margin in cash.

In one of the metrics used to examine the liquidity position (LCR, the liquidity coverage ratio) of financial groups, the Spanish pass the test with flying colors. “Recent events have seen the importance of liquidity. In the EU they stand at 165%, Spanish banks have 184% and in the United States, where only the large ones are analyzed, they are at 118%”, explained Margarita Delgado, deputy governor of the Bank of Spain, this Thursday. in the presentation of a report on the sector by the consulting firm PwC.

Differences with Silicon Valley Bank

Given the general photo, there are multiple differences with the case of Silicon Valley Bank. The main one is the weight that fixed income has over its total assets: “Silicon Valley Bank had 55% of fixed income, well above the average for European banks,” emphasized Santiago Martínez-Pinna, a partner at PwC’s financial and risk regulation unit, this Thursday.

Another difference is the need that financial groups on this side of the Atlantic might have to liquidate that investment. In the case of the Californian bank, its problem was the narrowing it suffered in its solvency, as Maudos adds: “The trigger has been having to urgently sell its debt with losses due to the rise in rates to face an exceptional withdrawal of deposits of large average amounts (few companies with large balances), something that does not occur in European banks, whose deposit base is retail (millions of deposits of much lower average amounts)”.

In the event of this hypothetical situation in Spain, the banks would suffer losses in value of just over 15,000 million. According to Alantra’s calculations, the most exposed is CaixaBank (6,700 million euros) and Santander (3,200 million). They are followed by BBVA (1,600 million), Unicaja (1,500 million), Sabadell (1,200 million) and Bankinter (1,000 million). Among these six listed companies, they accumulate almost 340,000 million euros of sovereign debt, according to what appears in the latest annual results accounts presented to the National Securities Market Commission (CNMV). In the case of Spanish bonds, the figure closed 2022 at 168,617 million, according to Treasury statistics, after an advance of 28,510 million in the year. Despite this, if compared to a decade ago, they still only have 13.64% of the total State debt, one and a half points more than in December 2021, but far from the third they had before the Great Recession.

With the data in hand, the ghosts of a banking crisis are not being seen for the moment, although the sector prefers caution. “There is nothing more cowardly than a million euros together,” recalls a senior manager of a national entity. The deputy governor of the Bank of Spain follows this line of prudence, even more so after the turmoil at Credit Suisse: “The case of Silicon Valley Bank cannot be extrapolated to Spanish and European groups, although unexpected cases cannot be ruled out” , settled.

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