Santander and BBVA get 5 billion capital gains thanks to debt rally | Financial markets

Santander and BBVA contained the debt boom in the final period of 2023. Last year, the two large Spanish banks achieved a combined return on financial (ROF) of almost 5 billion euros, up 34% on the previous year and in difficult conditions. : Fixed income, which makes up the majority of the portfolio’s for-sale assets, remained down for most of the year due to the continued rise in interest rates (bond prices were…

Santander and BBVA contained the debt boom in the final period of 2023. Last year, the two large Spanish banks achieved a combined return on financial (ROF) of almost 5 billion euros, up 34% on the previous year and in difficult conditions. : Fixed income, which makes up the majority of the for-sale portfolio, remained down for most of the year due to the continued rise in interest rates (bond prices move inversely to yields in the market), but which experienced a boom in the final months of the year. It was at this point that businesses took advantage of the opportunity to engage in debt buying and selling transactions that generated capital gains for them.

Santander increased its return on investment by 59% from a year earlier to €2.633 million. The company explains that the increase is primarily due to activities with clients of CIB, its investment banking business, in market transactions related to currency and interest rate hedging. For its part, BBVA generated a ROF of 2.183 million (+13%), and the bank also highlights market activity and investment banking operations thanks to revenues generated from foreign exchange transactions in emerging markets.

“The results of financial operations are driven by various factors. exchange rate relative to fiscal year 2022,” details Martha Alberni, Afi consultant.

In any case, both banks took advantage of the rally that occurred in the debt market at the end of the year to sell fixed income portfolios and realize the above-mentioned capital gains. “This issue is very volatile and depends on the active management of organizations. Debt was very volatile in 2023, but at the end of the year it grew strongly and some banks decided to sell and others did not,” other financial sources explain.

Financial transaction results primarily reflect the purchase and sale of fixed income, variable income, options and futures that financial entities enter into with their trading portfolio. This is active management, which, depending on the macroeconomic situation, can generate alternative income to the typical banking business.

The ambitious performance of the two large companies contrasts with the rest of the listed banks, which significantly reduced their financial results in 2023. CaixaBank recorded a ROF of 235 million (-28%), Sabadell 68 million (-35%), Bankinter 35.5 million (-50%) and Unicaja 20 million (-62%). The same sources explain that in their case, the active debt management they carried out was based on maintaining their positions, and they did not take advantage of the opportunity to sell in the last window of the year in which asset values ​​increased. . That’s why the results were so different.

“It is worth noting that in 2023, some businesses took advantage of favorable margin developments to materialize existing losses in their asset portfolios in the full-year income statement following the strong rise in interest rates, which negatively impacted this income item. results,” says Alberni.

Income injection

This item represents an insignificant part of banks’ total income. For Santander, this represents only 4.6% of the group’s annual revenue (2023 gross profit of $57,423 million). At BBVA, ROF is 7% of gross profit ($29,542 million). And in other banks the deposit is even smaller. CaixaBank has 1.6%; in Bankinter – 1.3%; in Sabadell – 1.2%; and in Unicaja, 1.1%. But in times of low interest rates, financial results represented another stream of income for banks due to lower interest margins.

In 2022, fixed income caused huge losses to debt holders who decided to divest their holdings as persistent rate hikes by central banks lowered its valuation. Fixed income gets its name because when it is issued (by companies or governments), a coupon (the interest the investor will receive for purchasing it) is set and remains unchanged until maturity. That is, when purchasing securities, the investor knows in advance how much money he will receive when the period for which they were issued expires.

However, when interest rates rise, bonds lose value because newly issued bonds pay a higher coupon. If the investor decides to keep the securities, he will also receive the interest agreed upon when purchasing them, but if he wants to sell them before maturity, he must reduce their value to provide the buyer with the same profitability as new ones. Problems.

In July 2022, the European Central Bank (ECB) decided to begin a process of continuously raising rates to address high inflation. Since then, he has carried out ten rate hikes to take them from 0% to the current 4.5%. And with each new increase, the previously issued debt adjusted its valuation downwards to provide the same yield as the new bonds. However, from the end of 2023, the market began to count on central banks lowering the price of money in 2024. This caused debt to increase by 10% between November and December. In fact, fixed income remains one of investors’ favorite bets this year.

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