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Economic and financial environment

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The rapid spread of the COVID-19 virus, especially in March and April, has sparked a historic global recession, the most severe since the Second World War, as a result of lockdown measures to stem the epidemic.

Although since May the restrictions on mobility and gatherings have been relaxed and business activity has picked up strongly in general, we estimate that world GDP dropped 5% in the second quarter of 2020, following a fall of 3% in the first quarter.

The recession affects all the main economies except China, which suffered a shock in the first quarter and started to recover in March. In the US and the euro area, the quarterly fall in GDP is expected to be between 8% and 9%, although in Europe there will be significant differences between countries: the contraction could exceed 10% in the countries most dependent on tourism and with less fiscal muscle (France, Spain and Italy) but is likely to be less severe in Germany (an estimated fall of 7%).

The scenario is still highly adverse, but the situation is improving, thanks to the exceptional fiscal support measures (more than $10 trillion worldwide) and the most expansionary monetary policy ever seen.

The Federal Reserve established a set of 11 lending facilities, involving practically all market segments, and has boosted the volume of some of them, while the ECB introduced new long-term refinancing operations for banks and improved the terms of existing facilities. The ECB also decided to increase the Pandemic Emergency Purchase Programme (PEPP), launched in March, from 750 billion euros to 1,350 billion and extended it until at least June 2021. All this has meant that, in just one quarter, the balance sheet of both central banks has grown substantially (+23% for the ECB and +35% for the Fed).

These measures have clearly been effective, as tensions have eased in all markets, especially the interbank market. The increase in the 12-month Euribor in the early stages of the crisis, due, among other things, to an increase in the risk premium, has been largely corrected. Peripheral bonds have also been another major beneficiary of the ECB’s strategy: Spanish and Italian 10-year yields fell by just over 20 bp and the two governments have had no difficulty meeting their borrowing needs.

In Spain, the crisis resulting from COVID-19 and the restrictions imposed in order to stop its spread have given rise to a historic decline in activity and employment. The extraordinary fall in GDP in the first quarter of 2020 (-5.2% quarter-on-quarter) will be amply exceeded in the second quarter, given that the lockdown measures have been in place for much of that period, compared to only two weeks in the previous quarter. Despite the mitigating effect of the temporary layoff schemes (ERTEs), employment fell 4.9% during the quarter (950,000 fewer registered employed than in the first quarter), making this the worst quarter in the series. Nevertheless, the drop in employment is consistent with the unprecedented decline in GDP (the Banco de España estimates a fall of between 16% and 21.8% quarter-on-quarter). On the positive side, households are in a better financial position to face the crisis. Although the growth of household income slowed in the first quarter of 2020, the slower growth has been cushioned by the support measures, while consumption has fallen sharply under lockdown. As a result, the household savings rate has soared (8.8 per cent of gross disposable income, the highest level in eight years), as also has household financing capacity (2.3 per cent of GDP, a new record).

At the end of this second quarter, the impact of the health crisis on the banking sector is evident. In this crisis, however, the banks have started from a strong position, underpinned by improved balance sheet quality and the major capital strengthening undertaken in recent years. Lending to corporates and SMEs is growing strongly, driven by intensive use of state-guaranteed lines of credit, while loans to households have been affected by the decrease in home mortgages and, above all, consumer loans, which would have been more severe without payment holidays. On the funding side, deposits by households and corporates and SMEs have increased strongly, reflecting the increase in the savings rate and the preference for low-risk assets. The positive market effect has partly offset the sharp decline in mutual and pension fund assets in March.

The measures to increase operational, prudential and regulatory flexibility to facilitate the proper functioning of the banking system and the recommendations to suspend dividend payments and be prudent in paying bonuses to employees have proven effective in channelling funds to strengthen capital positions and facilitate the flow of credit to the economy in recent months. The current situation of high uncertainty has significantly increased the downward pressure on bank profitability, in view of a potential deterioration in asset quality, which will require additional efforts to reduce costs and improve efficiency, while addressing other more recent challenges in relation to digitisation and cyber security.

Future impact of COVID-19 on the Bankia Group

Although the specific impact the current crisis and the mitigating effect of the state and industry support measures will have in future periods remains largely unpredictable, the Group faces a number of risks—risks common to the entire banking sector—linked to the future development of the pandemic. These include the risk of a significant increase in delinquency, the risk of a decrease in new lending to individuals (mainly consumer loans), an increased risk of asset impairment (including financial instruments measured at fair value, which may be subject to significant fluctuations, and securities held for liquidity purposes), and the risk of an increase in the Bank’s cost of funding (especially in the event of credit rating downgrades in the future).

The decline in production and consumption caused by the pandemic and the government support measures and the measures taken by Bankia to protect households, corporates and SMEs and the self-employed are also likely to have an adverse impact on results and operations, mainly through an increase in impairment losses associated with an increase in non-performing loans. Nevertheless, the Group expects a gradual recovery of the main revenue streams over the next few quarters, as business gradually recovers, combined with cost containment. Accordingly, the Group will continue to monitor its credit portfolios and the main risk indicators continuously to anticipate possible impacts of the crisis on asset quality

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