Assessing the Resilience of Spanish Banking Stocks in a Post-Pandemic Recovery

The post-pandemic recovery has tested the resilience of global banking systems, but Spanish banks have emerged as relative standouts. With robust profitability, strong capital buffers, and improving credit quality, institutions like Banco Santander, BBVA, and CaixaBank have navigated macroeconomic headwinds-including inflation, geopolitical tensions, and fiscal pressures-with notable stability. For investors, the question now is whether these banks can sustain their momentum amid lingering risks.

Credit Quality and Capital Strength: A Foundation for Resilience

Spanish banks have demonstrated impressive financial health metrics. As of recent reports, the sector's average return on equity (ROE) stands at 14.1%, while common equity tier 1 (CET1) ratios hover near 13.5%-figures that reflect strong profitability and capital adequacy, according to a Santander report. These metrics outpace many European peers and underscore the sector's ability to absorb shocks.

Improvements in credit quality have further bolstered confidence. Non-performing loan ratios have declined, supported by historically low debt levels in households and non-financial corporations. Reduced interest burdens, driven by monetary easing in the eurozone, have stabilized borrowing behavior and improved lending environments, the Santander report adds. This trend is critical for banks reliant on retail and corporate credit growth.

CDS Spreads: A Barometer of Market Confidence

Credit default swap (CDS) spreads offer a real-time gauge of market perceptions of credit risk. For Santander and BBVA, 5-year CDS spreads in Q3 2025 stood at 44.2 basis points (bps) and 42.4 bps, respectively, according to The Corner, significantly lower than Banco Sabadell's 104.8 bps and Bankinter's 71 bps. CaixaBank, meanwhile, recorded a spread of 65.35 bps, reflecting a narrowing but still elevated risk profile compared to its peers, as reported by The Corner.

These spreads highlight divergent trajectories within the sector. Santander and BBVA's low spreads suggest strong investor confidence, likely tied to their global diversification and disciplined cost management. CaixaBank's higher spread, while improved from earlier in 2025, indicates lingering concerns about its regional exposure and restructuring challenges.

Risk Mitigation: Policy Buffers and Structural Challenges

The Bank of Spain has proactively addressed systemic risks, signaling a potential increase in the countercyclical capital buffer (CCyB) to 1% by October 2026 if risks persist, according to the Santander report. This measure aims to absorb potential shocks from trade tensions or geopolitical volatility. However, structural challenges remain. The government's debt-to-GDP ratio of 101.8% constrains fiscal flexibility, while a proposed banking tax has raised concerns about reduced credit availability and sector resilience, as noted in the Santander report.

Geopolitical uncertainties and rising cyber threats also pose risks. Yet, Spanish banks' high liquidity and capital levels-unlike those during the 2008 crisis-position them to weather these pressures. Fitch Ratings notes that average operating profit to risk-weighted assets is expected to stabilize in 2024 before a slight decline in 2025, as policy interest rates moderate.

Outlook: Balancing Opportunities and Risks

The operating environment for Spanish banks is expected to improve gradually. A strong domestic economy, supported by low unemployment and resilient consumption, should underpin loan growth. However, investors must remain cautious about external shocks, such as U.S. fiscal policy shifts or a hardening of European trade policies, according to State Street.

For risk mitigation, diversification across the sector may be prudent. Santander and BBVA's low CDS spreads and global footprints make them attractive, while CaixaBank's higher spreads warrant closer scrutiny of its regional risks. Additionally, monitoring the Bank of Spain's CCyB adjustments and fiscal policy developments will be critical.

Conclusion

Spanish banking stocks offer a compelling mix of resilience and growth potential in a post-pandemic world. While credit quality improvements and strong capital metrics provide a solid foundation, investors must navigate structural fiscal risks and geopolitical uncertainties. For those willing to balance these factors, the sector's strategic positioning-coupled with proactive regulatory frameworks-presents opportunities for long-term value creation.