“The Spanish banking system is among the best in Europe in terms of efficiency”
Redacción Mapfre
The manager believes that, within the banking sector, it is the larger institutions that will perform better, while in terms of business model, retail banking will fare better. By geographical areas, Torres de Becerril highlights the potential of the Spanish banking system and claims that, in terms of efficiency, it is “among the best in Europe.”
1. How long have you been at MAPFRE AM? Tell us a bit about your professional career.
I joined MAPFRE AM in March 2017 as an equity portfolio manager. After graduating in Business Administration and Management at CUNEF, I spent four years competing for the post of Inspector of Credit Institutions at the Bank of Spain. That is precisely where my specialization in banking came from. I started my professional career in early 2013 at KPMG as a consultant in the forensics department. Subsequently, I worked at BBVA in investment banking as an Equity Research Analyst in the finance sector, until I joined MAPFRE AM.
2. Your specialty is banking, a sector that has been hit hard in recent years. Can the new episode of panic in the US and with Credit Suisse be considered over?
This episode of panic can be considered over... The actions of supervisors and central banks have been key to restoring confidence in the financial system and limiting systemic risk. Volatility levels in the finance sector have dropped considerably; US bank deposits remain stable after the run-off we saw following the collapse of Silicon Valley Bank in March; and in Europe, for example, the CoCos market (AT1) that collapsed after Credit Suisse went under has just reopened with a EUR 1 billion issuing by BBVA at a rate below the exit price...
But the side effects, from a regulatory point of view, as well as a lack of investor confidence, remain. On the regulatory side, all banking regulations, with special emphasis on liquidity, will undergo revision. In the US, there is talk of raising the capital requirements of American banks by around 20%. Europe will have stress tests this year, and it is very likely that they will result in recommendations to strengthen liquidity ratios or add additional requirements for more detailed information on the deposit base of banks. In terms of confidence, investors continue to distrust the banking sector, as evidenced by the risk premium that banks continue to carry. Discount rates have not yet recovered to pre-March levels, when the US regional banking crisis broke out.
3. Normally, this sector benefits in times of rising interest rates. Do you think that margins will also improve in this new cycle and, therefore, opportunities will open up in the stock market?
The improvement in net interest income in the banking sector is a fact. We will see the impact of the rate hike during 2023 and maybe to some extent in 2024, but thereafter we will see margins stabilize or even shrink, depending on the speed of deposit repricing and credit growth/slowdown. Market expectations already anticipate rate drops for 2024, so in 2025 we are likely to see margins fall.
The new cycle clearly opens up opportunities in the stock market. On average, the European banking sector is trading at levels of 0.75 times P/BV 2023, the same levels at which it has been trading on average for the last 10 years, with negative interest rates. The current prices do not reflect the improvements that we are going to see in income statements, both in terms of profitability and dividends, due to the rise in interest rates. This undervaluation is mainly due to macroeconomic uncertainty and a lack of investor confidence after the recent events. In the medium term, and as we see consistent results, the sector should recover its valuation potential quarter after quarter.
4. What types of institutions may perform better in the markets? Retail banking, investment banking, large institutions, small institutions, etc.
The best performers in the markets will depend on the risks that emerge. In the current scenario of liquidity tensions and economic slowdown, with high interest rates, large institutions with a global, diversified banking profile and exposure to emerging countries should fare better than smaller institutions.
In terms of business model, the outlook for pure investment banking is worse than for retail banking. Investment bank revenues have been at record highs for years and are likely to decelerate somewhat. Because they are highly leveraged banks with a large cost base, a fall in revenues means that their profit generation profile for the coming years will be impaired. Retail banking, on the other hand, has a high sensitivity to interest rates and lower operating leverage, so the outlook for this business is better.
5. And the Spanish banking system? Does it have any advantage over its European counterpart?
The Spanish banking system has many advantages over its European counterpart, the most significant of which is interest rate leverage. Compared to other European countries, more than 70% of credit in Spain is at variable rates, so the rise in interest rates has a major impact. In terms of efficiency, the Spanish banking system is among the best in Europe. A major restructuring effort has been made to reduce the number of institutions from more than sixty to around ten and reduce staff and office structures by more than 50%. Right now, the efficiency ratio in Spain is 45% on average, which compares to a Eurozone average of 55%. In digitalization and security, although IT spending appears lower than in other countries, Spanish banking is exceptional. Bizum, with more than 20 million users, is a clear example when it comes to payment methods and is now looking to export to other countries. As for liquidity, the Spanish banking system has a much higher coverage ratio than that of European institutions.
However, there are two aspects where we find ourselves below the European average: non-performing loans and capital. In NPLs, we have higher levels than the rest of Europe. Nevertheless, it should be noted that the management of non-performing and foreclosed loans — on display over the last few years — has been much more agile than in other European countries. As regards capital, while the levels we have are reasonable, it is true that we are below average with a CET1 ratio of 12.5% compared to an EU average of 15.5%, due to the higher density of assets and the reduced use of internal models.
6. Do you take ESG criteria into account in your analysis?
Yes, we take ESG criteria into consideration in our analysis and incorporate them in our investment policies. Compared to other sectors, we could say that banking is lagging behind in “E” and is ahead in “S” and “G.”
- In the environmental factors (E), we see that banks are channeling investment towards “green credit,” but they need to push harder to reduce financing to polluting sectors and reach the goal of a “zero emission credit portfolio by 2050.” They also need to improve how they disclose related information. Only around 50% of banks publish key performance indicators or climate and environmental risk indicators. The results of the ECB’s climate stress test also show that banks still do not adequately take climate-related risks into account in their credit risk models.
- In terms of social factors (S), banks have demonstrated their steadfast commitment through the work of banking foundations. As regards all else, social commitment is growing. This is evident from the Bloomberg Gender Equality Index (GEI), where banks that voluntarily disclose information in this index stand out from other industries. Elsewhere, for example, the percentage of women on boards of directors is close to 30% on average in the sector; although this may seem low, it is well above that of other sectors.
- In terms of governance (G), it should be noted that, in general, banking has the advantage of being a highly regulated sector, and the supervisor sets the guidelines to be followed in the corporate governance of institutions. For example, the chairman of a financial institution should not have executive powers, and the managing directors, once elected by the institutions, have to be approved by the ECB. We also see that banking institutions have a high percentage of independent directors on the board of directors.
7. In general, what are your forecasts for European equities against the current backdrop of great economic uncertainty?
In a context of great economic uncertainty, we are cautious when it comes to European equities. In general, the price multiples of European indices are not demanding, but we do believe that the 2024 and 2025 EPS estimates are anticipating an optimistic growth scenario that is far-fetched. Therefore, we see a risk of downgrading estimates, which generally leads to a stock market correction. If this scenario occurs, we need to be positioned in defensive sectors and in some cyclical sectors, such as banking, where the macro and earnings momentum is positive.
That said, as long as the “slowdown, yes/slowdown, no” debate continues, we expect volatility and sectoral rotation to continue in the coming months. Stock picking is the order of the day.
Hobbies: spending time with my family and friends, reading, traveling... and my passion is playing the piano.
Food: I have many, but I’d have to say some good fried eggs and French fries and coffee-flavored ice cream.
City/country: New York, London, Rome, Paris... and, no question, Madrid. A very special nod to Biarritz, where I have spent every summer since I was a child.
Favorite musical group/singer: U2 and Frank Sinatra.
