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Economic and financial environment

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After the world economy was hit by a historic recession in the second quarter of 2020 as a result of the lockdown to curb the COVID19 pandemic, the easing of those measures in May opened the door to a generalised albeit uneven rebound across the globe, spurred by unprecedented monetary and fiscal stimuli.

. The third quarter 2020 growth figures were very dynamic, but with the lone exception of China, fall far short of making up for the collapse suffered during the lockdown. The recovery will continue in the fourth quarter of the year, but at a much slower pace and with some sectors, such as hotels and restaurants, leisure and tourism, still stymied by the outbreak of second waves of the epidemic. The USA and Germany are therefore not be expected to recoup their pre-pandemic GDP levels until the first quarter of 2022, and countries in southern Europe may not close that gap until 2023, unless an effective and safe vaccine becomes available in the coming months. The effects of the crisis and the subsequent recovery are so uneven in the euro area that they represent a new threat of fragmentation. This has led the EU to sign a historic agreement, giving the green light to a Recovery Fund of 750 billion euros (390 in grants and the remaining 360 in credit facilities), which together with the SURE employment programme and soft credit lines made available to governments under the EFSM and to businesses by the EIB will increase the EU stimuli package to 1.3 trillion euros. The biggest beneficiaries will be the countries in eastern and southern Europe, with injections of aid that could surpass 10% of their GDP.

Central banks have also contributed to the recovery, maintaining very loose monetary policy and eschewing doubts as to its continuance in the coming years. In addition to temporarily expanding the facilities it introduced in the worst moments of the crisis, the Fed has retooled its strategy, allowing inflation to top 2% and placing greater emphasis on employment within its dual objective. The ECB is also considering changing its target inflation in step with the Fed and is starting to view QE as a standard part of its toolkit, instead of as an exceptional measure. All this confirms that interest rates will remain low for a long time and that the liquidity excess, which has taken the 12-month Euribor to new all-time lows, will remain very high.

This monetary policy, combined with the uncertainty stirred by the pandemic, has buoyed public debt, but especially peripheral bonds. Spanish and Portuguese 10-year yields shed 22 basis points in the third quarter of the year, while Italy's fell 39 basis points to new all-time lows in October. The ECB's purchases, search for returns, strong coverage of borrowing requirements, Italy's effective management of the second wave of the pandemic and the increased stability of its government after a string of electoral successes, have whetted investor appetite for these assets.

In Spain, after the sharp fall of the previous quarter, GDP is expected to rebound strongly in the third quarter of 2020, by around 13% q-o-q, although some weakening has been observed over the course of the quarter, due to growing uncertainty over new outbreaks of the pandemic and the lockdown measures that would follow. This explains the woeful tourist season, which, in turn, has curbed the recovery of the job market: despite record numbers of Social Security enrolments, there are still half a million fewer workers on active status than when the crisis started. In addition, the return of workers from the temporary furlough schemes (ERTEs) has slowed (there were still some 728,909 in ERTES at the end of September). Households have nonetheless managed to continue improving their financial position, responding to the second quarter's fall in income (softened by social welfare programmes) by slashing their consumer spending even more to send the household savings rate up to 11.2% of gross disposable income, a level not seen since 2010. Although some of the saving was precautionary, most was forced by the impossibility of consuming under the lockdown measures and restrictions. In the banking sector, the progressive activation of the programmes of pubic guarantees managed by ICO has been crucial for the necessary expansion of lending to meet the liquidity needs of the businesses hardest hit by the pandemic.

The effectiveness of those measures is reflected by the turnaround seen in the outstanding balance of loans and advances to businesses, which was shrinking before the start of the crisis and is now expanding. On the funding side, the volume of deposits in financial institutions continues trending upward, reflecting the rise in household savings to all-time highs and the accumulation of liquidity in businesses in the face of the uncertainty unleashed by the crisis. In this difficult environment, the sector's profitability has dipped, in part due to the anticipation of loan provisions. This will require new gains in efficiency not just by cost-cutting but also by boosting spending on digitisation and in new technologies and through the sector's consolidation. The capital adequacy of Spanish banks, meanwhile, remains strong, bearing out the importance of the prudential measures taken. In this context, in July the ECB released the aggregate results of its analysis of vulnerability to assess bank resilience to the disturbance generated by the pandemic. Those results indicate that, despite the heterogeneous situation seen across the sector, euro area banks, as a whole, have the capacity to withstand the impact of COVID-19.

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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