Spanish banks are poised for a return to normal activity in 2013 after setting aside billions of euros last year in provisions against potential losses on real-estate loans which holed their bottom line.
Combined net profit at the country's six biggest banks plunged in 2012 by 82 percent to 1.86 billion owing mostly to the rise in their provisions.
Banco Popular, which unlike its larger rivals has focused largely on the domestic market, paid the heaviest price, recording its first annual loss in its history.
The bank, Spain's fifth-biggest by market capitalisation, posted a net loss of 2.46 billion euros in 2012, compared with a net profit of 479.6 million euros in the previous year, owing to hefty provisions it had to take against bad loans.
But its competitors also recorded double-digit declines in their net profit.
Mid-sized Bankinter, which is not heavily exposed to Spain's real-estate market, recorded a 31 percent fall in its net profit while CaixaBank, Spain's biggest bank as measured by assets under management, saw its net profit plunge 78.2 percent as it was penalised by its acquisition of Banca Civica.
Santander, the biggest bank in the euro zone by market value, also did not escape with a 59 percent decline in net profit.
But the lender was able to limit the decline thanks to its geographical diversification.
Like its rival BBVA, Santander earns roughly half of its gross income in fast-growing Latin America.
In total Spain's six biggest banks put nearly 51 billion euros aside in 2012 to cover potential losses from dodgy loans and their exposure to Spain's real estate market.
The collapse of Spain's real estate market in 2008 caused a sharp rise in the non-performing loan ratio in many banks, fuelling doubts over the solidity of their balance sheets.
Last month the Bank of Spain said the country's banks held 191.6 billion euros' worth of bad or doubtful loans, nearly 11.4 percent of all credit extended.
The Spanish government ordered banks last year to boost the amount of money set aside to cover potential losses in case property-related loans go bad.
About 20 billion euros of the 51 billion euros which Spain's six largest banks made in provisions responded to the new government requirements.
The effort allows the banks to argue that the bulk of the work to clean up their accounts following the property-market collapse is behind them.
BBVA's prospects for 2013 are "very positive", the bank's chairman Francisco Gonzalez told a news conference on Friday called to discuss its annual results.
"There are solid fundamentals which give way to a new cycle of growth in net profit," he added.
Santander stressed that after the hefty provisions which it made last year of nearly 19 billion euros, it only has 800 million euros in exceptional items to remove from its 2013 results.
While CaixaBank made 10.3 billion euros in write-downs and provisioning charges last year, the amount this year will drop to 902 million euros.
If the huge charges which Santander had to take are excluded, the bank said it would have boosted net profit by about 2.0 percent to 23.6 billion euros last year.
"Profits reached a turning point in 2012," Santander chairman Emilio Botin said after the lender's 2012 results were announced last week.
Although the Spanish economy is expected to continue to contract this year -- by 0.5 percent according to the government and by 1.5 percent according to the International Monetary Fund -- many analysts belive the geographic diversification of Spain's large lenders will help them weather the downturn.
"Although the economic situation in Spain remains a risk, in particular with downside risks to Spanish profits in 2014, we believe that profits from Mexico and Latin America can provide an offset," Daragh Quinn, an analyst at Nomura said a note.
The Spanish government's nationalisation and takeover of troubled lender Bankia last year for 23.5 billion euros prompted Madrid to seek a rescue loan of up to 100 billion euros from its euro zone partners for its banking sector.
Four Spanish banks and a so-called bad bank that has taken over many risky loans have received 39.5 billion euros so far from the European Union.
The International Monetary Fund said on Monday that the clean-up of Spain's weakest banks was well advanced.
"This clean-up is a major achievement that should strengthen confidence in the system and improve its ability to support the real economy," it said in a monitoring mission report.