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JLR
Registered Member

Date Joined Apr 2010
Total Posts : 3

Posted 4/14/2010 4:11 AM (GMT +8)

Things have not turned up for Spain and I would even argue are looking less optimistic especially since today the president of the Central Bank of Spain has mentioned that it's banking system is in dire straits. Why I wonder have its major banking stocks outperfomed the broader market and its European peers? It has surprised me even more so since the major Spanish banking institutions are very fully valued compared to their European peers. Should we take note and view this as a turn of events and better times to come for Spain and its economy?

Gavin Bowring
Registered Member

Date Joined Feb 2009
Total Posts : 81

Posted 4/20/2010 11:11 PM (GMT +8)

It is true that Spain's big banks have been comparatively well managed in comparison to their European peers- they had much less exposure to subprime, toxic derivatives and leveraged buyouts. This in itself has allowed Santander and BBVA to exert the confidence to expand their overseas operations, including Santander's Brazil IPO and BBVA's increasing exposure to Asia.

Meanwhile, the aggressive expansion of Spain's caja savings banks (numbering around 45) during the boom years meant it is they that took on a large proportion of the exposure to local property developers, loans for which have now gone sour. The caja banks remain the bogeymen in Spain's financial system- as of December 2009, the cajas held 54% of total developer loans, compared to 40% for commercial banks, and the caja sector has a loan to deposit ratio of roughly 120%.

When the president of the central bank of spain talked of its banking system in dire straits, he was largel referring to this major segment of Spanish banking, which is oftern heavily intertwined with politics, given that Spanish cajas are defined by their region and hence often have links with respective regional an other political interests.

A former economy minister and chairman of one Spanish caja recently estimated that around half the country’s 45 cajas are due to disappear in the next two years, through consolidation. Although this in itself is a good thing, given the regionalism factor it is uncertain at present how a consolidation would play out or whether it would improve loan quality.

Meanwhile, the bigger banks have started off a deposits price war, with BBVA recently deciding to match the 4% deposit rate offered by Santander. On the one hand, many believe that this war would mean a great loss of deposit revenue for the cajas, given that they are unlikely to be able to match BBVA/Santander low rates. On the other, it could also be a negative for the big banks as they will be earning lower margin rates on deposits.

There does appear to be a positive side for consumers and mortgage holders, despite the unemployment Over 90% of total mortgages in Spain are variable rate loans tied to the Euribor, much higher than the average of 50%. However, we think that Euribor rates are likely to remain low for a while, meaning that, for now, Spain's households are getting pretty good low deals on their mortgages.

Still, many of the macro risks look dire. According to recent data from Morgan Stanley, construction investment remains way above its long-term average as a share of total output, currently at 13.8% compared to its LT average 13.3%, and with no clear substitute to drive economic growth in coming years bar a slight rebound in exports, prices are set for a further correction. This is amplified by the fact that, over the past five year, 2.8 million have been constructed but only 1.5 million sold, leaving a large supply glut.

Latest figures reported in the Spanish press show that at least 120,000 Spaniards have emigrated from the country since 2008 and are continuing to do so.

Still, this remains more of a private sector problem. The sum of the country's household and corporate debt amounts to 220% of GDP, far higher than the EU average, however government debt as % of GDP is only half that of Greece, and the country appears to have semblances of fiscal discipline. Spain has already begun to take measures to improve its fiscal outlook, increasing VAT rates and the like. However, most of these measures have come from the cost cutting rather than revenue generating side.

The real risk here from the macro side is that, come the end of June, which is the deadline for banks to apply to Spain's Fund for Bank Restrucutring, that large volumes of new fund provision for banks will be needed from the government, which could present a fiscal risk. At present, this Bank Restructuring Fund has been funded 12 billion euros, but it may need much more than this come end of June. The next few months will thus be crucial to watch from the macro perspective, particularly since a lot of Spanish debt (and Spanish debtors have taken on a particularly high proportion of short term debt), will mature by the summer.

JLR
Registered Member

Date Joined Apr 2010
Total Posts : 3

Posted 5/12/2010 1:26 AM (GMT +8)

I understand what you mean about the commercial banks being well run and the major issues facing Spain. We've just been through some of the most volatile periods in sovereign Euro but throughout Spain was able to issue sovereign debt.

The main concern I have is that the Eurozone countries were stuck between a rock and a hard place and had to do something. However it as of yet is not money printing and therefore different from the BOE or FED since the ECB will sterilize. In addition the plans attack liquidity not solvency. GM and Chrysler also needed liquidity during their restructuring but were still very much insolvent. The main point being that either growth or inflation gets around the solvency issue and an ECB that sterilizes is not getting inflation and substantial austerity does not create growth.

The current program will, in my opinion, therefore only delay another crisis but not eliminate its likelihood. It became obviously clear that the major core countries, and especially Germany, were not prepared for a financial crisis at this time.

It would be obvious to me that pressure will mount again going forward since (1) the BaFin will most likely order the German banks to sell PGS debt i.e. some burden-sharing (via the ECB - buyer of last resort) and (2) structural issues as mentioned above.

However what struck me in your comment is that over 90% of total mortgages are vaiable rate. Does the ECB when taking these as collateral take these as being AAA i.e. similar to sovereign risk? In addition are these fixed Euribor loans or teasers such as in the US where the annual cost moves higher over time? Finally what the average life-span of a mortgage as either they need to be rolled or paid down.

Relaying your comment and my observations to the banking stocks, it would still be my opinion that BBVA & Santander will be the proxi for the Spanish economy (austerity & deflation) and the banking sector. The should be major underperformers going forward.

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