Impact of Debt downgrade on the Spanish banking industry

The primary objective of this document is to analyze the impact on the profitability of the Spanish banking industry as a result of the sovereign debt downgrade as well as the banksï¾Ãƒâ€šÃ‚Æ’?? debt downgrade. In order to get a proper understanding of the problem, the document discusses in detail the macroeconomic and other parameters that led to the downgrade before presenting the impacts particularly in banking sector. Then the article takes you to the different consequences of the downgrade that will have an impact on Spanish banking industry relative to the top-line and bottom-line, impact on major players in the industry, key factors that led to the failure of Bankia, a big player and the risk mitigation strategies for Spanish banks in order to maintain profitable operations. As a result of the downgrade of Spanish sovereign debt and banksï¾Ãƒâ€šÃ‚Æ’?? debt, banks will have to pay higher costs for raising funds, either through deposits or through bond issues. A downgraded rating will result in an increase of perceived risk among investors. Hence the banks will witness an increase in their funding costs, which will in turn increase their operating costs and finally will impact the net income. In the current scenario of bad state of economy which puts a constraint on credit growth and severe competition which itself puts pressure on pricing, it would be very difficult for the banks to pass on the increased?? funding costs to customers, thereby losing valuable service offerings. Hence the banks will have to come up with risk mitigation strategies in order to maintain a consistent rate of return and to reduce the impact on profitability.