EARNINGS PREVIEW: Spain Banks Face Thin Margins, Loan Losses

TAKING THE PULSE: The earnings performance of Spain's two biggest listed banks and the country's smaller domestically-focused ones parted ways early in the financial crisis, with Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA) generating growth in their international businesses while smaller lenders remained mired in the domestic economy where loan volumes were shrinking and credit was going bad fast.

The sovereign debt crisis hit Spanish banks head on, making it harder and much more expensive for lenders to get funding from international investors, and drew them into an expensive battle for deposits at home.

Banks are expected to continue to take additional loan-loss charges on their exposure to commercial real-estate, putting more pressure on earnings.

Fourth-quarter results from Banco Espanol de Credito SA (BTO.MC) and Bankinter SA (BKT.MC) earlier this month indicated what the sector is up for, with Banesto setting aside a large chunk of cash to cover problem loans, and Bankinter reporting almost no quarterly profit because of a squeeze on margins.

The largest banks aren't immune to the problems in Spain, but analysts say they will benefit from robust earnings in Latin America and elsewhere. For that reason most analysts continue to favor these big lenders.

COMPANIES TO WATCH:

---Banco Bilbao Vizcaya Argentaria SA (BBVA)---(Wednesday, Feb. 2)

MARKET EXPECTATIONS: BBVA may report a jump in fourth-quarter profit, because it took hefty write-downs in 2009 that it won't repeat this quarter. A FactSet survey of six analyst estimates pegs net profit at EUR972 million for the quarter, up from EUR31 million a year earlier. Higher profit in Mexico and South America, and a timid recovery in the U.S. will underpin performance in the period, analysts say.

MAIN FOCUS: Analysts will look for detail on how the bank plans to cope with rapidly increasing wholesale financing costs, which puts it at a disadvantage against rival European banks. The outlook for the Spanish economy is a key theme, as is the dividend. Earlier in the crisis, BBVA cut its dividend to boost solvency, and investors will want to know if the time has come to reverse that policy.

---Banco Santander SA (STD)---(Thursday, Feb. 3)

MARKET EXPECTATIONS: Santander will benefit from robust loan growth in Chile, Mexico and Brazil, and healthy profit in the U.K., helping offset weaker earnings in Spain. A FactSet survey of five analyst estimates put net profit at EUR2.09 billion for the quarter, down from EUR2.20 billion a year earlier. The bank has already flagged that earnings will come in below the bank's stated annual profit target of EUR8.89 billion.

MAIN FOCUS: Investors will be watching Santander's capital ratios as the bank digests a recent string of acquisitions. They will also be looking for guidance on potential management changes following a recent Supreme Court ruling that could bar the current chief executive from working as a banker.

---Banco Popular Espanol SA (POP.MC)---(Friday, Feb. 4)

MARKET EXPECTATIONS: Popular is expected to continue to set aside cash for real-estate related loan losses and to take write-downs on its exposure to the sector. It will have continued to grab market share in deposits, though it is paying a high price to do so, analysts say. A FactSet survey of 10 analyst estimates pegged net profit at EUR85.6 million for the quarter, down from EUR114 million a year earlier.

MAIN FOCUS: Asset quality is still the main concern among investors, even if loan losses have stabilized in recent quarters after growing sharply earlier in the downturn.

-By Christopher Bjork; Dow Jones Newswires; +34913958123; christopher.bjork@dowjones.com

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