Spanish economic outlook. June 2017

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1 Spanish economic outlook June 2017

2 1 2 3 Spanish economy a pleasant surprise Growth drivers Forecasts once again bright

3 One of the most dynamic economies in Europe Spain growing at a faster rate than EMU over last three years 0.8% 3

4 Job creation rates on the up... Number of Social Security registered members returns to 2009 levels 3.8% 2.3% 4

5 ... while high unemployment rate falls Decrease in active population also a factor -2.2 pp 5

6 Household consumption remains buoyant Greater consumer confidence following political uncertainty in

7 Housing market recovery gaining strength Rising demand driving up new house building +15% 1Q % 1Q 17 7

8 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 y/y rate of change % Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 y/y rate of change % Spanish economic outlook June 2017 Sharp rise in lending to households New loans to house purchase 27.2% New loans to households (2007 = 100) Total Housing -10 Consumption New consumer loans Credit card Loans 29.8% % Source: Bank of Spain and Bankia Research 8

9 Notable uptick in business turnover Growth rates accelerating since mid

10 Signs of a rise in business spending also evident Decisions pushed back in 2016 now starting to be acted upon 10

11 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 y/y rate of change % Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 y/y rate of chane % Spanish economic outlook June 2017 Credit starts flowing to businesses once again New loans to SMEs % New credits to non-financial corporations (2007 = 100) Total SMEs -10 Large firms 80 New loans to large firms % Source: Bank of Spain and Bankia Research 11

12 Surge in tourism key to Spanish economy Country remains attractive to tourists compared to competing destinations 12% 6% 12

13 Spike in inflation has hit its peak Trend shaped by energy prices Main downsides stem from effect on competitiveness and on purchasing power of households. The other side of the coin is the effect on nominal GDP growth and therefore, tax receipts and deleveraging. 13

14 How is the Spanish economy performing? Inflection point not yet reached, raising growth forecasts Spanish economy is not only not slowing down, it is actually gaining strength Rate of job creation is on the up Expectations and confidence indicators are improving Tourism sector continuing to have a very positive impact Exports are increasingly buoyant and rising faster than imports Spending decisions that were delayed due to uncertainty are now being acted upon Property sector recovery is gathering pace Demand for finance has reignited Downside risks are waning 14

15 1 2 3 Spanish economy surprisingly upbeat Growth drivers Forecasts once again bright

16 More balanced composition of growth All components of GDP are contributing positively to growth, and the countercyclical nature of external demand has been broken 16

17 More robust growth figures Initial boost came from exports GDP has returned to 2008 levels, although the share of each component has changed. Excessive share of construction and imports has been corrected. 17

18 Leading to highest current account surplus on record... Although high level of external debt means country is still extremely vulnerable 2.1% of GDP 85.7% 18

19 ... thanks to an improvement in competitiveness... Reflected in the increased share of world exports of merchandise 19

20 ... and efforts to internationalise Renewed push to ramp up exports, which had been curtailed over the last decade 20

21 Financing capacity has allowed progress to be made in reducing high levels of debt Private sector has done much to degear 21

22 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 % of GDP y/y rate of change % Spanish economic outlook June 2017 Deleveraging process reaching its conclusion Outstanding stock of loans continues to shrink, albeit at an increasingly moderate rate, while rate of new lending is on the up Loans. Households & Non-financial corporations Spain Italy Germany France Euro area Loans. Households & Non-financial corporations Total Non-Financial corporations Households billion Last 12 months , Source: BCE & Bankia Estudios Source: BdE & Bankia Estudios 22

23 Major impact of drop in debt servicing costs, especially for businesses Greater fall in interest paid than interest received Compared to 2008, interest paid by households has decreased by 34.7 billion, while they received billion less in interest. Over the last eight years, businesses interest payments have fallen by over 48.7 billion, compared to a reduction in interest received of just billion. 23

24 Progress made and challenges ahead after a deep, drawn out crisis Flow variables brighter, although certain stock measures remain weak More balanced growth Greater competitiveness Internationalisation of business Foreign trade surplus Degearing of private sector Correction of budget deficit Cleaning up of financial sector High unemployment rate, especially among young people Notable salary cuts Slow improvement in productivity High level of external debt Structural public debt Structural imbalance in pension system 24

25 1 2 3 Spanish economy surprisingly upbeat Growth drivers Forecasts once again bright

26 Forecasts once again bright Upward trends The satisfactory tone of the latest indicators is steering forecasts upwards. If risks abroad do not have a negative impact on the global economy, GDP may grow at a faster rate than was projected in the near term. 26

27 Are drivers being undervalued? Keys to dynamism of Spanish economy Risks prevailing, but with limited impact at present Global growth scenario brighter Boost from tourism due to heightened geopolitical risks in competing destinations Signs of constrained investment and consumption Impact of interest rate cuts on financing cost Climate of domestic and foreign political uncertainty Protectionism and growth in world trade Brexit Monetary policy (ECB tapering) Greater competitiveness and less elasticity of imports than domestic demand 27

28 We envisage the upswing to continue Although the rate of recovery will slow as a number of temporary drivers are offset 3.2% 2.9% 2.5% y/y (p) 2018 (p) Households consumption 2,8% 3,2% 2,6% 2,2% General Government consumption 2,0% 0,8% 1,2% 1,3% Gross Fixed Capital Formation 6,0% 3,1% 3,8% 4,1% Equipment 8,9% 5,0% 5,3% 5,0% Construction 4,9% 1,9% 3,2% 3,5% Domestic demand contribution (pp) 3,3 2,8 2,4 2,2 Exports 4,9% 4,4% 5,0% 4,2% Imports 5,6% 3,3% 3,8% 3,8% External demand contribution (pp) -0,1 0,5 0,5 0,3 Real GDP 3,2% 3,2% 2,9% 2,5% Nominal GDP 3,7% 3,6% 4,7% 4,5% Inflation (yearly average) -0,5% -0,2% 2,2% 1,6% Employment 3,0% 2,9% 2,6% 2,2% Employment (y/y thousands, 4Q) Unemployment rate (yearly average) 22,1% 19,6% 17,2% 15,2% (p) Bankia Estudios forecasts. 28

29 Key household consumption factors Strong employment growth Increase in household wealth Favourable forecasts Low interest rates Postponed spending decisions now being acted upon Slower uptick in disposable income Loss of purchasing power due to rising inflation Need to continue deleveraging and re-establish low savings rates 29

30 Key investment factors Favourable borrowing conditions Brighter demand forecasts Projects postponed in 2016 now being started Acceleration of housing segment Greater tax burden on businesses Sluggishness of public works activity Greater contribution of intangible investment Greater use of production capacity 30

31 Key external demand factors Dynamism of global markets Internationalisation of business Competitiveness gains Favourable exchange rate Boost from tourism Decent sales of other services Loss of competitiveness due to second period of rising inflation Brexit Potential rise in protectionism Oil price hike Imports replaced by national output 31

32 Legal notice This document has been prepared by Bankia, S.A. ( Bankia ) and is for information purposes only. It is not a prospectus nor does it represent an offer or recommendation to invest. This document does not constitute a commitment to subscribe, an offer of financing, an offer to sell, or a request for an offer to purchase Bankia securities, which must be subject to Bankia s internal authorisations. Bankia cannot guarantee the accuracy or comprehensive nature of the information contained in this document. The information contained herein has been obtained from sources that Bankia considers to be reliable. However, Bankia does not claim or guarantee that it is complete or accurate, especially in the case of data provided by third parties. This document may contain abridged or unaudited information and its recipients are advised to consult the documentation and public information filed by Bankia with the securities market supervisory authorities. All opinions and estimates are provided as at the date indicated in this document and may be subject to change. The value of any investment may fluctuate as a result of changes in the market. The information in this document is not intended to predict future results and no guarantees are provided in relation to this information. This document includes, or may include, forward looking information or assumptions. This information or assumptions represent Bankia s opinions and expectations regarding the performance of its business and the generation of revenues. However, this performance may be significantly affected in the future by certain risks, uncertainties and other relevant factors that may cause the expected evolution of the business and revenue generation to significantly differ from our expectations. These factors include, but are not limited to, i) the situation in the market, macroeconomic factors, government and supervisory guidelines, ii) movements in national and international securities markets, exchange rates and interest rates, and changes in market risk and operational risk, iii) pressure from competition, iv) technological changes, v) judicial and arbitration procedures, and vi) variations in the financial status or solvency of our customers, debtors and counterparties. Additional information about the risks that may affect Bankia s financial situation can be found in the approved Registry Document filed with the Official Register of the Spanish Securities Market Commission (CNMV). Distribution of this document in other jurisdictions may be forbidden and recipients of this document, or anyone that obtains a copy, shall be responsible for being aware of these restrictions and compliance with them. This document does not disclose all of the risks or other significant aspects related to investing in Bankia securities or operations. Prior to executing any transaction, potential investors must ensure that they fully understand the terms and conditions of the corresponding securities/operations and the risks inherent in them. This document is not a prospectus for the securities described herein. Potential investors must only subscribe to Bankia securities taking into account the information published in the corresponding Bankia prospectus and not on the basis of the information contained in this document.

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