July 24, 2020

Elena IparraguirreMiriam FernándezLucía GonzálezAntonio RizzoMarta Heras

Spanish Banks:COVID-19 Changes Everything

Updated Expectations

2

– We expect the Spanish economy will only recover to pre-COVID-19 crisis levels in 2022, while a second wave of contagion or policy mistakes could lead to more severe contraction this year or a softer longer rebound.

– The outlook bias on Spanish banks has turned negative.

– We now expect credit costs will increase to 80-100 bps of average loans in 2020--more thandouble our previous estimate of 35 bps--and remain at similar levels in 2021.

– We forecast NPAs will peak at around 9.5% in 2021, and we expect some longer delays in divestingthe stock of legacy problematic assets from the previous downturn.

– Banks face tougher profitability challenges, with bottom-line results likely to halve this year, reinforcing the rationale for consolidation, particularly among midsize players.

– Capitalization should hold up well for most banks, but some have limited buffers to absorb a more negative shock than we currently forecast.

– Banks will make ample use of ECB funding facilities, and will continue building bail-in-ablecushions, but at a likely slower pace.

Banks' Outlook Bias Turned Negative…

Rating Actions In April 2020– All ratings affirmed.

– Outlooks on five banks revised to negativefrom stable.

– Outlook on one bank revised to stable frompositive.

– Existing negative outlooks on another threeinstitutions maintained at negative.

– Four banks kept stable outlooks.

We lowered the rating on Mulhacen to 'CCC+' with a negative outlook on July 14, 2020. Chart data as of July 24, 2020. S--Stable. N--Negative. Source: S&P Global Ratings.

Amid COVID-19, We Affirmed All Spanish Bank Ratings In April

3

Stable38%

Negative62%

Majority Of Banks Now Carry Negative Outlooks

N

N N

S S N

S S S N

N N

N

CCC

CCC+

B-

B

B+

BB-

BB

BB+

BBB-

BBB

BBB+

A-

A

A+

AA-Issuer credit rating Outlook Spain sovereign rating

N N

Our Latest Estimates Point To A 9.8% Decline In GDP Followed By Only A Partial Recovery In 2021

We Revised Our BICRA Economic Risk Trend To Negative

…As The Economic Shock Of The PandemicBecame Clear

(10%)

(8%)

(6%)

(4%)

(2%)

0%

2%

4%

6%

8%

2014 2015 2016 2017 2018 2019 2020f 2021f 2022f

Spain real GDP % Spain previous real GDP %

4

f--Forecast. Source: S&P Global Ratings. Data as of July 13, 2020. Source: S&P Global Ratings.

Compared To The Previous Downturn…

5

0

50

100

150

200

250

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

f

2021

f

2022

f

Spain public sector debt/GDP

Spain private sector debt/GDP

The Private Sector Carries Far Less Debt

1,0001,2001,4001,6001,8002,0002,200

0200,000400,000600,000800,000

1,000,0001,200,000

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

Dec

-16

Dec

-17

Dec

-18

Total Housing Transactions (Left Axis)

Average Price New Housing (Right Axis)

Housing Prices Are Well Below The Peak

0

500

1,000

1,500

2,000

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Bil.

€

Domestic corporate,household andNPISH loans

Domestic corporate,household andNPISH deposits

Banks' Funding Profiles Are Balanced

f--Forecast. NPISH--Nonprofit institutions serving households. Sources: S&P Global Ratings, Bank of Spain.

%

€/meter squared

Total housing transactions (left scale)

Average price new housing (right scale)

Domestic corporate, household, and NPISH loans

Domestic corporate, household, and NPISH deposits

1,2001,000

800600400

2000Th

ousa

nd (1

2 m

onth

s cu

mul

ativ

e)

Source: Ministerio de Transporte, Movilidad y Agenda Urbana.Source: S&P Global Ratings.

About 6% Of Household Exposures CurrentlyBenefit From Moratorium Schemes

The €100 Billion State Guarantee – Equivalent To Almost One Fifth Of Corporate Loans At End-2019 –Has Helped Maintain Banks' Credit Flow To Companies

Unprecedented Fiscal, Monetary, And RegulatoryMeasures Will Help Contain The Damage

Government-sponsored mortgages

49%

Government-sponsored consumer

lending7%

Banks-sponsored schemes

44%

Total granted: €41.6 billion

6

67.5

25.0

2.54.5

0

10

20

30

40

50

60

70

80

90

100Not allocated

Transportation-related

Tourism-related

Corporates

SMEs and self-employed

Source: Bank of Spain, Instituto de Credito Oficial, S&P Global Ratings.

Sta

tegu

aran

teed

loan

s(b

il. €

)

0

10

20

30

40

50

60

70

80

90

100 Other

Agro

IT

Textile

Food andbeverageTransportation

ConsumergoodsDurable goods

ProfessionalservicesConstruction

Tourism

Amount granted(until June 30)

Total to be allocated

– The short-term nature of the COVID-19 shock and the government and banks’ initiatives to support the private sector will contain losses.

– But we see annual domestic credit losses more than doubling compared to our previous estimates, standing at 80-100 bps both in 2020 and 2021.

– NPAs will peak in 2021 at about 9.5%, and it will take longer to work out the legacy stock of NPAs left by previousrecession.

COVID-19 Brought To A Sudden Stop The Previous Declining Trend Of Credit Losses And NPAs

Provisions And Nonperforming Assets Will Increase

0%

5%

10%

15%

20%

0%

2%

4%

6%

8%

10%

Credit losses as a % of average loans (left scale)Previous expected credit losses (left scale)NPA ratio (right scale)Previous expected NPA ratio (right scale)

7

0%

10%

20%

30%

40%

50%

60%

70%

0%

2%

4%

6%

8%

10%

12%

Real Estate Assets (left scale)

Non Performing Loans (left scale)

Coverage (right scale)

Nonperforming loans (left scale)

Real estate assets (left scale)

f--Forecast. NPA--Nonperforming asset. Sources: S&P Global Ratings, Bank of Spain.

Spanish Banks Face The Shock With Legacy NPAs From Previous Recession In Their Books

Data as a percentage of domestic gross loans. Data as of end-2019. Source: Banks' financial statements.

We Meaningfully Revised Our Credit Loss Expectations For This Year And The Next

Banks With Larger SME And Consumer Exposure Are More Prone To Asset Quality Erosion

Credit Costs Lower For Banks With LargerMortgage Books

0 50 100 150 200 250 300 350

BBVA

Santander

SCF

Sabadell

Caixabank

Bankia

Bankinter

Ibercaja

Abanca

Kutxabank

Caja Laboral

2020-2021 credit losses pre-COVID-19

2020-2021 credit losses COVID-19 impact

8

0% 20% 40% 60% 80% 100%

Santander

Sabadell

BBVA

Bankinter

Caixabank

Abanca

Bankia

Ibercaja

Laboral

Kutxabank

Domestic Loan Book

Mortgages Corporate Lending SME Lending

RE & Developers Other Retail

Domestic loan book

Real estate and developers

Other

SME lendingCorporate lending

bp--Basis point. CoR--Cost of risk. Sources: S&P Global Ratings, banks' financial statements.

SME--Small and midsize enterprise. Data as of end-2019. Source: Banks' financial statements.

Cumulative CoR (bps)

Spanish Banks' RoE Will Decline Significantly In 2020, Improving Only Slightly In 2021

Higher Credit Losses And Earnings Pressure WillWeaken Already Modest Profitability Prospects…

0%

2%

4%

6%

8%

10%

12%

14%

Bankinter SCF Caixabank BBVA Laboral Santander Cecabank Kutxabank Sabadell Abanca Ibercaja Bankia*

2019 2020f 2021f

RoE

9

*Data for BFA Bankia before minorities. f--Forecast. RoE--Return on equity. Sources: S&P Global Ratings, banks' financial statements.

Midsize And Smaller Players Will Likely Face More Profitability And Tech Disruption Challenges

Poor Earnings Prospects Have Driven Down Equity Valuations

…Strengthening The Case For FurtherConsolidation And Depressing Equity Valuations

10

0.0x

0.2x

0.4x

0.6x

0.8x

1.0x

1.2x

1.4x

Bankinter Santander BBVASabadell Bankia Caixabank

Source: Banks' financial statements as of end-2019. Source: Capital IQ.

0 100 200 300 400

BBVA

Caixabank

Santander

Bankia

Sabadell

Bankinter

Kutxabank

Abanca

Unicaja

Ibercaja

Liberbank

Laboral

Bil. €

Domestic assets

2019

2020f

2021f

Capital Will Hold Up, But Some Banks Have MoreLimited Buffers Against A Harsher Scenario

11

Arrows signify buffer. Pink arrows signify limited buffer. f--Forecast. RAC--Risk-adjusted capital. Source: S&P Global Ratings.

S&

P G

loba

l Rat

ings

RA

C r

atio

(%)

Strong (10%-15%)

Adequate (7%-10%)

Moderate (5%-7%)

Weak(3%-5%)

Very Weak (0%-3%)

Banks Largely Borrowed The Maximum ECB Long-Term Funding Allowed

Some Of These Funds Will Likely Be Channeled To Build Government Bond Portfolios

Revised TLTRO III Is An Attractive Funding OptionFor Banks But It Could Reinforce The Sovereign-Bank Nexus

12

ECB--European Central Bank. TLTRO--Targeted longer-term refinancing operations. Source: S&P Global Ratings.

Source: Bank of Spain.

0 20 40 60

Laboral

Ibercaja

Kutxabank

Abanca

Bankinter

Bankia

Sabadell

BBVA

Caixabank

Santander

TLTRO-III take up

Bil. €

0

50

100

150

200

250

300

Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20

Gov

ernm

ent

bond

hol

ding

s (b

il. €

)

Most Banks Are Already Compliant Or Close To Complying With MREL

ALAC Buffers Are Getting Closer To The Required Thresholds

MREL Buildup Will Continue, But At A Slower Pace

0% 5% 10% 15% 20% 25% 30%

Santander*

BBVA

Bankia

Sabadell

Caixabank

Ibercaja

Abanca

Kutxabank

Bankinter

MREL built MREL requirement

13

0%

1%

2%

3%

4%

5%

BBVA Santander Sabadell Bankia Caixabank

2020f 2021f 2022f

*S&P Global Ratings estimate. Data for MREL buildup as of Q1 2020 except for Ibercaja (Q4 2020). MREL--Minimum requirement for own funds and eligible liabilities. RWA--Risk-weighted asset. Source: S&P Global Ratings, banks' financials.

ALAC--Additional loss-absorbing capacity. f--Forecast. Sources: S&P Global Ratings, Bank of Spain.

– Absent urgent regulatory need, bailinable debt issuance to fill gaps or improve the subordinated MREL components, will likely slow.

– No ratings on the five banks with a defined bail-in resolution strategy currently benefit from ALAC uplift, although some are closer to the thresholds than a year ago.

– For other banks with sale-of-business resolution strategies, ALAC uplift would be contingent on assurance that all senior creditors would be treated similarly in resolution.

MREL/RWAs

ALA

C b

uffe

r/R

WA

s

Threshold for one notch of uplift

Threshold Santander and BBVA

Related Research

– Global Banks Outlook Midyear 2020: Temporary Shock, Profound Implications, July 9, 2020

– The $2 Trillion Question: What's On The Horizon For Bank Credit Losses, July 9, 2020

– ECB Set To Ease Regulatory Hurdles To Eurozone Bank Consolidation, July 3, 2020

– Asset Quality Not ECB Liquidity Will Determine Eurozone Banks' Fates, July 2, 2020

– Banking Industry Country Risk Assessment: Spain, June 18, 2020

– How COVID-19 Is Affecting Bank Ratings: June Update, June 11, 2020

– The Seven Key Questions We Ask About Eurozone Government Debt Profiles, May 21, 2020

– Spain, May 20, 2020

– Government Job Support Will Stem European Housing Market Price Falls, May 15, 2020

– Outlook Revised To Negative On Several Spanish Banks On Deepening COVID-19 Downside Risks, April 29, 2020

– Spanish Banks Are At A Crossroads, March 6, 2020

– Tech Disruption In Retail Banking: Spanish Banks Have Time to Adapt, But Risk Falling Flat, Feb. 17, 2020

– Contingency Risk From IRPH-Linked Mortgage Litigation Claims Is Reducing for Spanish Banks, Sept. 19, 2019

14

https://www.capitaliq.com/CIQDotNet/CreditResearch/viewPDF.aspx?pdfId=44900&from=Researchhttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45320188&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45274358&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45260793&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45156975&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=45106414&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44935964&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44042919&From=SNP_REShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44897385&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=44747438&From=SNP_CRShttps://www.standardandpoors.com/pt_LA/delegate/getPDF;jsessionid=5B4F5065EDF83A9014F52D9394B74F81?articleId=2393472&type=COMMENTS&subType=https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=43764444&From=SNP_CRShttps://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=42455897&From=SNP_CRS

Lucía GonzálezAssociate Director lucia.gonzalez@spglobal.com+91-788-7219

Miriam FernándezAssociate miriam.fernandez@spglobal.com+34-91-788-7232

Analytical Contacts

15

Elena IparraguirreDirector – Lead Analyst Spain & Portugalelena.iparraguirre@spglobal.com+34-91-389-6963

Antonio RizzoAssociate Directorantonio.rizzo@spglobal.com+91-788-7205

Marta HerasRating Analystmarta.heras@spglobal.com+91-389-6967

mailto:lucia.gonzalez@spglobal.commailto:miriam.fernandez@spglobal.commailto:elena.iparraguirre@spglobal.commailto:antonio.rizzo@spglobal.commailto:marta.heras@spglobal.com

16

Copyright © 2020 by Standard & Poor’s Financial Services LLC. All rights reserved.

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.spcapitaliq.com (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Australia: S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings' credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

STANDARD & POOR'S, S&P and RATINGSDIRECT are registered trademarks of Standard & Poor's Financial Services LLC.

spglobal.com/ratings

Spanish Banks:�COVID-19 Changes EverythingUpdated ExpectationsBanks' Outlook Bias Turned Negative……As The Economic Shock Of The Pandemic Became ClearCompared To The Previous Downturn… Unprecedented Fiscal, Monetary, And Regulatory Measures Will Help Contain The DamageProvisions And Nonperforming Assets Will IncreaseCredit Costs Lower For Banks With Larger Mortgage BooksHigher Credit Losses And Earnings Pressure Will Weaken Already Modest Profitability Prospects……Strengthening The Case For Further Consolidation And Depressing Equity ValuationsCapital Will Hold Up, But Some Banks Have More Limited Buffers Against A Harsher ScenarioRevised TLTRO III Is An Attractive Funding Option For Banks But It Could Reinforce The Sovereign-Bank NexusMREL Buildup Will Continue, But At A Slower PaceRelated ResearchAnalytical ContactsSlide Number 16