Banks are turning a profit

Spanish banks, savings banks, cooperatives and other financial establishments finished the second quarter with 3.095 billion euros in earnings. These are the greatest three months of performance since mid-2010 when the first major wave of savings bank mergers took place.

Traditional business was not responsible for the improved numbers. Instead, two events have put the banks back in black. First, they have not had to come up with large provisions in order to clean up their balance sheets, because they already have these funds set aside. Second, they have executed important divestments in order to meet capital requirements that the EU has imposed and done prefered stock switches that resulted in revenues.

This is not an ideal scenario, but similar to what has happened in other sectors of the economy, the trend is changing for the better. And banks are hoping that this trend continues in the second half of the year. Their hopes are based largely on improved operating margins now that the Bank of Spain is requiring bank to hold less in cash deposits and somewhat on the Spanish economy's slow improvement. Continued improvement of the Spanish economy is critical for the banks, because a stronger economy would decrease loan defaults, which are a major burden for the sector. In six months, the percentage of loans to default has gone from 10.43% to 11.61%.

So there is no reason for celebration yet. We will have to wait several months for the next earnings report to know if this quarter's results were more than some dreamy summer romance. The success of the banking sector will depend on whether credit starts to flow again for small and mid-size companies and whether the economy starts to grow -- however slowly.