Spanish banks: plain and able

Spain's economy is flourishing again - at least by the harsh standards of its recent past - with better-than-expected 0.9 per cent growth in the first quarter. Assuming this is not a shortlived bull run and Madrid's punchy 2.9 per cent output forecast for this year is on the money, Spain is poised to be the fastest-growing big eurozone economy this year. Time, then, to see if its crisis-chastened banks can ride this run.

Four lenders - Popular, BBVA, Caixabank and Bankia - were on form in the first quarter, beating expectations. Santander was merely in line and Bankinter undershot. But Spaniards are still deleveraging after their pre-crisis excesses, and banks' net interest income growth, though helped by lower funding costs, does not look assured. It was weak in the domestic operations of BBVA and Santander, but up a quarter at nimbler - and more conservative - lender Bankinter, and solid at Caixabank. Nor is net fee income recovering solidly. It contracted at Bankia and Santander. So who is cutting costs to prop up returns? Popular set the pace, cutting total costs by 5 per cent from a year ago, yet BBVA led the charge on efficiency, Citi data show, with a domestic cost-to-income ratio of 42.2 per cent. The banks need to pump volume over their cost base.

What about their balance sheets? Asset quality is improving. But non-performing loans still accounted for 12.9 per cent of system lending at end-February, albeit down 120 basis points from a year earlier. Conservative lender Bankinter has the lowest bad loan ratio, at 5 per cent - well under half that of Sabadell, the lender poised to absorb TSB in the UK.

Lenders are also more shockproof. Santander is now the only Spanish lender with a common equity tier one capital ratio below 10 per cent. Bankia, once emblematic of Spain's bank crisis, has the country's second strongest capital ratio after Sabadell.

Spaniards are spending again, but it will take longer for them to regain the confidence to borrow. Spain's now more staid banks, trading on a fitter 1.1 times book value, may be more ready for action than in recent memory. Sadly, there is little to goad their valuations while they wait for it.

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