Evolving Banking Strategy in Spain’s Interest Landscape
The uneven transmission of higher interest rates into banking products produced a multibillion euro bill for Spanish households in 2023. Loans became more expensive as official rates rose, driven by the European Central Bank’s effort to curb inflation. Banks responded by delaying higher returns on deposits to squeeze the most profit from lending. As a result, households paid 28.102 billion euros in interest during the year, up 10.041 billion from 2022, even though the total stock of outstanding credit fell by 2.4 percent. By comparison, interest earned on deposits and remunerated accounts reached 2.147 billion euros, only 1.917 billion more than the previous year. These dynamics help explain why the gap between interest paid and received by individuals widened in 2023, reaching 25.955 billion euros, a rise of 45 percent and 8.124 billion more than in 2022, according to estimates based on public data from the Bank of Spain. For perspective, in 2021, the year before the ECB began tightening policy to tame price surges, households paid 16.234 billion in interest and received a mere 169 million, a gap of 16.065 billion.
In short, the divergent paths of loan and deposit rates illustrate why banks in Spain enjoyed a stronger business position. From January to September, the sector’s core profitability rose to 18.193 billion euros, up 3.507 billion and 24 percent from the same period a year earlier, nearly matching the entire 2022 figure of 19.430 billion, the highest in 15 years. The six largest Spanish banks Santander, BBVA, CaixaBank, Sabadell, Bankinter and Unicaja collectively earned 25.9315 billion euros in 2023, a 24 percent gain across domestic and international operations. Between January and September, return on equity advanced from 10 percent to 12.29 percent, a level deemed reasonable by the banks and consistent with investor expectations.
Banking Strategy
The data reflect the bank sector’s two year strategy. On one hand, the ECB’s tighter monetary stance pushed already issued variable rate loans higher in line with contract terms, and the pricing of new loans rose accordingly as reference rates climbed. On the other hand, the sector slowed the pace of deposit remuneration, leveraging abundant liquidity and reduced credit demand. The Bank of Spain has repeatedly observed that savings returns rose notably less than in previous rate-hike periods and less than in the euro area as a whole.
Recent reports show the average interest on new fixed-term deposits in Spain rose by about 2.5 percentage points from December 2021 to November last year, compared with a 3.8 point rise that would have occurred if the 2003 to 2007 pattern had repeated itself. In the euro zone, the increase was 3.1 points versus 4.1 points in the earlier episode, meaning deposits rose but lagged behind past peaks. By contrast, the rise in rates on new Spanish mortgages was only slightly below the euro area average, illustrating a somewhat narrower impact on loan pricing, though it fell short of the previously seen pace.
Monthly Invoice
The consequence of these trends is a sharp rise in monthly interest payments by households, from 1.343 billion in December 2021 to 2.595 billion in the latest data from January, while the monthly income from deposits and remunerated accounts hovered around 329 million, up just 315 million over that period. This widening gap expanded the banks’ monthly margin by 936 million euros, a 70 percent improvement to 2.265 billion. After peaking at 2.344 billion in November, the monthly margin eased gradually as markets anticipated a BCE rate cut around the middle of the year.
The current rate path shows signs of a change in trend. In the absence of negative surprises, central banks have signaled a gradual easing of policy starting around June. The one-year Euribor declined from 4.16 percent in October to 3.609 percent in January, then nudged higher to 3.671 percent in February as markets recalibrated expectations about early cuts. Experts project a level near 3 to 3.25 percent by year end.
As a result, variable-rate mortgages with semiannual adjustments began to fall, while those with annual revisions are set to do so in the coming months. The banking sector promptly reduced the rate on new deposits in January, the largest cut since June 2013, moving from 2.578 percent to 2.377 percent. The anticipated midterm outlook is for loan costs to soften, while deposit remuneration contracts may also ease, balancing the overall picture for lenders and borrowers alike.