Spain's largest banks are expected to report improved profits for 2022 in the coming days thanks to strong growth in net interest income.

Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA, CaixaBank SA and Banco de Sabadell SA are all forecast to post improved net income for full year 2022, S&P Global Capital IQ mean consensus estimates show.

Sabadell is seen as the biggest riser, with analysts expecting net income to jump 47.2% year over year to €784.5 million. The lender reported net income of €317 million for the three months to Sept. 30, 2022, its best quarterly result since acquiring U.K.-based TSB in 2015.

Net interest income boost

Higher net interest income, or NII, — the difference between interest revenues and interest expenses — is the key driver of Spanish banks' earnings growth as rising central bank interest rates have boosted lenders' margins.

Spanish banks benefit more from higher rates than many European lenders due to the prevalence of variable rate products in their loan books. All four banks are forecast to report higher NII in each of the next three years.

Sabadell in October raised its full-year NII guidance thanks to faster-than-anticipated rate hikes. The bank said it expects double-digit growth for the year, though analysts are forecasting an 8.2% rise to €3.71 billion.

BBVA has the highest projected NII increase in the sample at 29.6%, equating to an annual result of €19.04 billion. Santander, which like BBVA has significant exposure beyond its home market, is forecast to report €38.58 billion of NII, 15.6% higher than in 2021, Capital IQ data shows.

The higher rate sensitivity has helped Spanish bank shares outperform their European peers over the past year. All four have far surpassed the S&P Europe BMI Banks index's 2.6% rise since the start of 2022, with Sabadell and CaixaBank posting share price gains of roughly 60%.

Provisions set to rise

Spain will be one of the more robust European economies in 2023, according to economists at ING, who expect 0.9% growth during the year. Even so, loan loss provisions are forecast to rise at Santander, BBVA and CaixaBank in each of the next three years, according to consensus estimates, reflecting increased pressure on borrowers.

Spanish lenders face further headwinds from the change to the terms of the ECB's third targeted longer-term refinancing operation program, or TLTRO III, which will prevent them from earning interest on cheap funds deposited at the central bank. They will also be subject to a €3 billion windfall tax over the next two years.

Bankinter SA, Spain's sixth largest bank by assets, on Jan. 19 kicked off the earnings season by reporting a 28% rise in 2022 net income. NII rose 20.5%, and the bank said it expects a similar growth rate in 2023.

Sabadell reports earnings Jan. 26, followed by BBVA Feb. 1, Santander Feb. 2 and CaixaBank Feb. 3.

* Access CaixaBank's income statement on CapIQPro. * Access Sabadell's income statement on CapIQPro. * Access aggregate financial highlights for Spanish banks on CapIQPro.