EARNINGS PREVIEW: In Spain, The Big Banks Have Edge In 2Q

TAKING THE PULSE: Big is beautiful for Spanish banks this quarter: The country's two largest lenders are reaping the benefits of their international expansion to offset the deep economic malaise of Spain.

Both the second-quarter earnings and the upcoming release of stress test results likely will highlight the relative strength of Santander and BBVA, two lenders that are reaping the full benefits of improving economic trends in Latin America. The numbers are likely to look good not just within Spain but also compared with other European banks' figures, analysts say.

For the smaller banks that focus lending activity in Spain, the picture is bleaker. The economic downturn is putting pressure on revenue and lending margins. Meanwhile, data from the Bank of Spain show that bad bank debt topped EUR100 billion in Spain for the first time ever in May, to 5.5% of total loans. Lenders with high exposure to real estate developers, like Banco Popular and Banco Sabadell, could have a more difficult time than the rest. Loan losses aren't likely to peak before well into 2011, midsize lender Banesto warned last week.

Nomura looked at possible trades ahead of earnings, and recommends being overweight Santander versus underweight Banco Popular, saying that the latter may come worse out in the stress test. Another possible pair trade is overweight Banesto versus underweight Sabadell, a play on Banesto's stronger revenue performance and healthier loan book.

COMPANIES TO WATCH:

*Banco Sabadell SA (SAB.MC) -- July 22

Key Issues: The midsize lender has accrued capital gains with the sale of several assets in the last quarter, which likely will be set aside to cover souring loans and write-downs on real estate assets. The bank, which recently agreed to take over smaller rival Guipuzcoano and made an unsuccessful bid for savings bank Cajasur, may face some tough questions about its aggressive acquisition strategy at a time when other rivals prefer to sit on the fence and hoard capital.

*Bankinter SA (BKT.MC) -- July 22

Key Issues: Bankinter will face a bigger margin squeeze than rivals, due to a more aggressive pricing policy on loans and after it had to increase yields on deposits to keep customers from defecting to rival banks that offer higher interest rates. And despite having the healthiest loan book in Spain, a number of analyst reports have also named it as a candidate to do poorly in the EU stress tests due to its relatively stretched capital ratios.

*Banco Popular Espanol SA (POP.MC) -- July 27

Key Issues: Popular has exposure to a couple of recent high-profile corporate failures in the real estate sector, highlighting its excessive lending to that sector during the last years of Spain's construction boom. Offsetting a losses from real estate lending, the bank recently booked a gain from the sale of a package of branches to French lender Credit Mutuel as part of a deal to set up a joint business in Spain. Investors will be interested in hearing more about the plans for this venture. Credit Mutuel also plans to buy 5% of Popular, and investors remain in the dark on whether Popular will issue shares for this purchase or if the French bank will buy stock in the market.

*Banco Bilbao Vizcaya Argentaria SA (BBVA) -- July 28

Key Issues: BBVA will rely on the strength of Mexico and other Latin American economies to offset weakness in Spain in the second quarter. The Mexican economy is roaring back to life thanks to a pickup in growth in the U.S., leading to robust loan growth there. In Spain the bank is expected to report resilient results, even if it faces sharp competition for deposits after bigger rival Santander launched an aggressive campaign. Lending activity likely has remained anemic.

*Banco Santander SA (STD) -- July 29

Key Issues: Santander has had a triumphant quarter, highlighted by a very successful campaign to capture deposits from rival banks, allowing it to grab some EUR30 billion. This likely has squeezed lending margins in Spain, but Santander says it hopes to offset this by selling other products to the clients it gains with the deposit push. Brazil and the rest of Latin America is likely to drive earnings, while the U.K. business is expected to be robust as well.

-By Christopher Bjork, Dow Jones Newswires; 34 913958123; christopher.bjork@dowjones.com

BBVA Bilbao Vizcaya Arge... (NYSE:BBVA)
Historical Stock Chart
From May 2024 to Jun 2024