Spanish banking maybe dodge losses in 2020 Despite the crisis, but will not be able to do the same next year, in Santander’s opinion. A report from your investment banking unit estimates a Pre-tax profit drop of between 105% and 130% next year, depending on the depth of the recession. Likewise, it considers that the current stock market valuations of the sector are not excessively low, as argued by almost all entities, but rather realistic.

As Bolsamania advanced, the Spanish banks asked the ECB not to force it to provision so much as to make losses. According to Santander, this will be possible in 2020 (although in its worst scenario the profit will be zero), but by no means in 2021, when the sector as a whole will enter greater or lesser losses.

Santander’s investment banking unit acknowledges that making forecasts on banking results is almost impossible, given the low visibility. So set up two conservative scenarios, one base and the other bearish. Depending on the severity of the economic crisis, the pre-tax benefit (PBT) will drop 75% in 2020 and 105% (that is, the sector will enter losses) in 2021 in the best case; at worst, the drop will be 100% (i.e. zero profit) this year and the 130% in the next.

The key to determine the depth of the damage in the banking results are the provisionsthat is, the write-downs that entities will have to do to cover the wave of delinquencies caused by the confinement (LLP, Loan Loss Provisions). The estimate of the bank chaired by Ana Botín is that these will triple those of 2019 (technically, what it estimates is the cost of risk, which is the allocations to provisions divided by the total credit, which is estimated to go from 40 basis points to 120).

IS THE BANK CHEAP IN A STOCK MARKET AFTER THE FALL? NOT

Provisions are also key to sector equity valuations: “Market valuations are based on earnings and earnings in times of crisis are based on impairments” (and provisions to cover them). According to his calculations, the market discounts a cost of risk of 180 basis points. Are you exaggerating? That is to say,the sector has gone from stock market crash and does it have the capacity to climb?

Well, not much, in Santander’s opinion, although it also does not forecast a catastrophic scenario in which provisions affect capital significantly and that leads to resolutions or bailouts (thanks largely to the relaxation of the provisions rules that the ECB has allowed ). Thus, he calculates that the cost of risk shoots up to 184 basis points on average in 2020, 2021 and 2022; a very high level, but far from those reached in the previous crisis, where the 2011-2013 average was 310 basis points, with a maximum of 571 in 2012.

And, most importantly, that figure of 184 is in line with the 180 that the market discounts, which means that the Spanish banking is not cheap on the stock market despite the sharp accumulated falls, but correctly valued (fair value). Of course, Santander warns that its calculation does not take into account the relief for provisions derived from public guarantees, “which we hope will be significant.”

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