By Jesús Aguado
Like other European banks, Spanish lenders are grappling with the consequences of the European Central Bank's September decision to cut its key deposit rate further into negative territory, making it tough for banks to earn money from their traditional lending business.
In July, even before the ECB rate cut, Bankia said that it would be unable to meet its 1.3 billion euro (1.12 billion pounds) net profit target in 2020.
On Monday it posted a 23% drop in third-quarter net profit from a year earlier to 176 million euros due to higher litigation and loan loss provisions, slightly above an average of 173 million euros forecast by a Reuters poll.
Net interest income (NII), a measure of earnings on loans minus deposit costs, rose 1.4% to 502 million euros, in line with analysts' forecasts. Against the previous quarter, however, NII was down 2.7%.
Bankia's chief executive officer Jose Sevilla declined to give a new profit forecast for 2020.
However, he acknowledged that NII could be slightly below the 2.05 billion euro flat guidance for 2019 compared to 2018, with a shortfall of 13 million euros after the first nine months.
"It is true that interest rates in the second part of the year are lower than we had expected in our business plan and this is hurting our financial margins," Sevilla told journalists.
Analysts at UBS had previously cast doubt over Bankia's management's ability to repeat last year's NII figure, which would require around a 5% quarter-on-quarter pick up in the fourth quarter.
On Monday, smaller savings bank Unicaja also reported a more than 3% fall in NII in the third quarter against the year-ago period and a 2.5% drop against the previous quarter.
Shares in Bankia were down 3.6% at 1149 GMT, while Unicaja stock was up 1.4%.
FOCUSSING ON CONSUMER LENDING
In an attempt to offset the impact of increasing competition on margins, Spanish banks are focussing on cutting costs.
Bankia is shifting its focus from a mostly mortgage loan book to a more profitable consumer and enterprise business.
On Monday, Bankia said it was advancing in setting up a joint venture unit called 'Soyou' with Credit Agricole in consumer lending.
In the first nine months, Bankia expanded its net loan book by 0.4%.
At the end of September, Bankia's core Tier-1 capital ratio, the strictest measure of solvency, was 13% compared to 12.91% at the end of June.
Bankia has so far generated 1.28 billion euros in excess capital since it launched its plan in February last year to return 2.5 billion euros to shareholders over three years in an effort to pay back part of public bailout cash.[L8N27C0DD]
Bankia got a 22.4 billion-euro rescue package in 2012 to recover from property-loan losses at the height of Spain's financial crisis. The government is now selling off the 61% stake it holds.
(Reporting By Jesús Aguado; additional reporting by Clara-Laeila Laudette; editing by Emelia Sithole-Matarise, Kirsten Donovan)
By JesÃºs Aguado