Spanish bank profits are expected to continue falling sharply in the coming months as demand for mortgages and consumer finance slump, and provisions for bad loans rise amid the coronavirus pandemic.

Five of Spain's largest lenders posted a sharp drop in profits in the three months to March 31, according to S&P Global Market Intelligence data. Analysts anticipate a bigger hit in the coming quarters as the depth of the crisis, which has struck Spain particularly hard, becomes clearer.

The country had 218,011 confirmed cases and 25,428 deaths as of 8:52 a.m. Madrid time May 5, according to U.S.-based Johns Hopkins University. Strict lockdown measures have been in place since March 14, almost halting the economy and raising concerns of rising bad loans and a capital crunch for Spanish banks.

A sharp rise in lending following the March 17 launch of the government's €200 billion economic package, which included the provision of state-backed loans for companies in difficulty, will not protect banks from the onslaught of the economic downturn caused by the coronavirus, according to analysts.

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First-quarter earnings did not reflect the full impact of the COVID-19 pandemic, Pablo Manzano, vice president of global financial institutions at DBRS Morningstar said via email. "We expect the [pandemic] to unfold in 2020 and negatively affect earnings for the rest of the year," he said.

Banco Santander SA's first-quarter earnings slumped 82% to €331 million, while Banco Bilbao Vizcaya Argentaria SA posted a loss of €1.79 billion, compared with a profit of €1.18 billion in the year ago period, according to S&P Global Market Intelligence data. CaixaBank SA reported an 83% drop in earnings to €90 million, while Banco de Sabadell SA's profit in the quarter fell 63.7% to €94 million. State-owned Bankia SA posted the smallest decline, down 54.2% to €93.9 million.

Return on average equity — a key measure of profitability — at Santander fell to 2.39% in the first quarter from 8.25% a year ago and to a negative 12.46% at BBVA compared with a positive 10.64% the year before. At CaixaBank, the ratio stood at 1.46% compared with 8.75% the year before, while at Sabadell and Bankia, ROAE slumped to 2.95% and 2.86% from 8.44% and 6.23% respectively.

As Spain has had one of the strictest lockdowns in Europe, the country's banks may be worse affected by the crisis than some European peers, Javier Santacruz, Spanish banking specialist and economist at the Instituto de Estudios Bursátiles in Madrid, said in an interview.

The impact on earnings will depend on how quickly businesses start reopening as Spain eases its lockdown, but sectors such as consumer finance, mortgage lending and business banking "will suffer a lot," he said.

Santander's new mortgage lending declined 60% between February and April 22 and new consumer lending was down 25% in the period, the lender said.

Large outflows from the banks' asset management business will also have an impact, Santacruz said, estimating that Spanish banks saw €5 billion in outflows in March and €500 million in April.

Earnings "will be affected by the sharp falls in stock markets weighing on capital market revenues and fees from asset management," Arnaud Journois, vice president of global financial institutions at DBRS Morningstar, said via email.

The five largest lenders took heavy provisions in the first quarter, setting aside money to cover anticipated coronavirus-related losses, but analysts said they will likely be insufficient, further pressuring earnings.

Profits will also weaken as banks "step up loan loss provisioning for their exposures while loan growth is likely to be lower than the previous year," Journois said.

Nonperforming loan ratios are yet to be impacted, DBRS Morningstar's Manzano said. Spain's banks have been selling off bad loans, a legacy from the country's real estate boom and bust, and have significantly reduced their NPL ratios, but the coronavirus may halt that process.

"It is too early to see the economic deterioration filtering into asset quality. Having said that, we expect to see asset quality deterioration in coming quarters," Manzano said, adding that as earnings suffer, the banks' capital ratios will also face "negative pressure."

An easing of regulatory requirements and dividend cancellations does give extra room for maneuver amid the COVID-19 crisis, he said.

Spanish banks have among the lowest common equity Tier 1 ratios — a key measure of financial strength — of European banks. BBVA was the worst hit during the first quarter as it did not cancel its 2019 dividend, having held its shareholder meeting March 13, before the ECB recommended that lenders retain these payments to boost capital.

Its first quarter CET1 ratio fell to 11.08% from 11.98% at the end of 2019, while Santander's figure declined to 11.58% from 11.65%. At CaixaBank, the ratio dipped to 12.01% from 12.03% at the end of 2019, Sabadell's CET1 ratio dropped to 12.16% from 12.45%, and Bankia's ratio decreased to 13.98% from 14.32%.