The ECB asks "prudence" to the bench before the "mirage" of improving the profitability of entities

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The bank withstood the turbulence unleashed by the crisis of the US regional entities in March and the fall of Credit Suisse well, but as is often said in the financial markets, past returns do not guarantee future returns and a warning in this sense is what has been said. released this monday Luis de Guindos, vice president of the European Central Bank (ECB), on the stability and profitability of the banking system in the region. The current context “obliges us to be prudent because we are witnessing a certain mirage regarding the improvement of banks’ profitability,” said the vice president of Eurobanco at the inauguration of the XIV Financial Meeting organized by the newspaper Expansion y KPMG.

The situation of the entities is one of the vulnerabilities that the European supervisor closely monitors, especially due to the possible impact that factors such as the increase in financing costs may have; the lower credit activity; the lower economic growth, due to its possible impact on doubtful credit and the increase in provisions – “it is already beginning to be seen that in previous states there is beginning to be an accumulation of arrears” -, and due to the impact of some political decisions such as the banking tax that countries like Spain or Italy have established.

“All this is reflected in the valuations (…) and forces us to be cautious, because perhaps we are witnessing a mirage effect with the improvement of profitability in the banks,” shared De Guindos. The valuations of European banks “have not improved in parallel” with the improvement in profitability they recorded in the second quarter of the year and the increase in the cost of capital reflects that uncertainty. Specifically, the vice president of the ECB has indicated that the cost of capital for European banks is around 14%, while the return on capital reaches 11%.

“Prudence is a very important value” in the distribution of dividends, share repurchases and even in remuneration.

In addition, he has also warned that the absence of a complete Banking Union due to the lack of a common deposit guarantee fund is a “focus of vulnerability.”

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