By Christopher Bjork and Pablo Domínguez
MADRID--Spanish banks Caixabank SA and Banco Popular Español SA
said Friday that rising bad loans and restructuring costs caused by
the country's grinding recession continued to damp earnings in the
second quarter.
Caixabank, Spain's third-largest lender by market value and
boasting the country's biggest branch network, said costs
associated with recent takeovers and a round of layoffs weighed on
earnings. Net profit dropped 38% on the year to 73 million euros
($97 million) from EUR118 million a year earlier. It has fully
integrated two troubled banks in less than a year.
On the plus side, Caixabank's takeovers increased its gross
margin--which is a banking industry measure of revenue--to EUR1.93
billion from EUR1.74 billion a year earlier.
Chief Executive Joan Maria Nin said the bank should be able to
squeeze more cost savings than previously expected from those deals
and that income from its newly incorporated clients will grow
significantly.
He said expectations that Spain will now climb out of recession
in the third quarter offer a glimmer of hope for banks following
more than five years of crisis. "There are numbers and events that
clearly are different ... we are at an inflection point," he
said.
Smaller rival Popular, Spain's fifth-largest bank by market
value, said fewer loans and falling fee income caused
second-quarter profit to fall 12% to EUR66.1 million from EUR75.4
million a year earlier.
Still, the result beat analyst expectations. Income and lending
margins were weaker than a year ago but improved from the first
quarter because of easing deposit and wholesale funding costs in
the last three months.
Popular's CEO Francisco Gómez said he expects lending margins to
improve further in coming quarters. "Lower costs of funding should
be a vector of growth," he said.
Nomura International analyst Daragh Quinn noted the improved
margins but pointed out that bad loans are still growing at a swift
pace compared with Caixabank and others. Popular's stock of bad
loans reached EUR16.7 billion in the quarter, up 57% on the
year.
Both banks set aside a significant chunk of profit against loan
losses. Caixabank made provisions of EUR925 million, slightly below
the EUR940 million it set aside a year earlier. The figure at
Popular was EUR518.6 million for provisions and write-offs compared
with EUR534.5 million a year earlier.
The Bank of Spain has told lenders to review their refinanced
debts and increase their coverage levels on these loans, arguing
that debtors who need to refinance are often financially
distressed. Banks have to set aside this cash by September this
year. Popular said it will act later, Caixabank took the hit this
quarter.
Caixabank pledged EUR540 million for this purpose while Popular
said it expects the impact from the new rules to be limited as it
cleaned up its balance sheet late last year by raising EUR2.5
billion through a capital increase. The cash call allowed Popular
to avoid requesting state aid last year.
A local newspaper reported earlier this month that Caixabank had
recently approached Popular to discuss a potential merger. Similar
contacts ended inconclusively last year, according to people with
knowledge of the talks.
"The board has reiterated its absolute preference for
independence," Mr Gomez told analysts.
Write to Christopher Bjork at christopher.bjork@wsj.com and
Pablo Domínguez at pablo.dominguez@wsj.com
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