Spanish Bank Stocks in Firing Line of Loan-Focused Earnings

A big week for European bank earnings will sharpen investor focus on one of the weakest links -- Spain.

Spanish banks’ exceptionally poor showing has stood out this year, reflecting challenges from negative interest rates, pandemic-related loan loss provisions and exposure to emerging markets. Banco Santander SA bucked the trend with a rally on Tuesday after reporting an earnings rebound from its worst-ever quarter, and investors are waiting to see later this week whether its peers follow the same road to recovery.

The performance of Spanish banks will be crucial to the recovery of the economy, which is projected to contract 12% this year -- a pace worse than the euro-area. Spain has been particularly hard-hit by the virus, being the first Western European country to surpass 1 million infections, while simultaneously grappling with a broken political system. The prospect of more lockdowns could exacerbate headwinds for the nation and its banks.

Spanish Bank Stocks in Firing Line of Loan-Focused Earnings

“Spain has real problems,” said Sean George, chief investment officer at Strukturinvest AB in Stockholm. He has reduced his exposure to Spanish banks during the pandemic because “the capital and profit outlooks are looking bleaker heading into 2021.”

These are Spanish banks’ biggest challenges, in four charts:

Biggest Laggards

Spanish banks have significantly underperformed European peers, sending the IBEX 35 Banks Index’s ratio versus the Stoxx 600 Banks Index to about the lowest on record dating back to 2015.

Spanish Bank Stocks in Firing Line of Loan-Focused Earnings

Three Spanish banks -- Santander, Banco de Sabadell SA and Banco Bilbao Vizcaya Argentaria SA -- are among the 10-worst performing European lenders this year before today.

Santander climbed 4.3% on Tuesday after third-quarter net income of 1.75 billion euros ($2.1 billion) beat estimates, thanks to a boost from its operations in Brazil. Investors will watch results from Sabadell and BBVA, both scheduled for the end of the week, to see whether they can replicate Santander’s success.

Sabadell is said to have been working with Goldman Sachs Group Inc. in recent months to explore options including a sale or merger, asset disposals or buying a smaller competitor.

BBVA has been pressured by low capital, emerging markets exposure and currency depreciation, while a low profit buffer and elevated credit charges have weighed on Sabadell, according to Bloomberg Intelligence banking analyst Georgi Gunchev.

Earnings Pitfalls

Spanish banks’ 12-month forward earnings per share estimates have been cut by over half since the start of the year. While estimates for European lenders have fallen 42%, they are recovering faster. Since the start of September, they’ve risen 5%, while EPS forecasts for Spanish banks are little changed.

Spanish Bank Stocks in Firing Line of Loan-Focused Earnings

Not even a third-quarter net income beat saved Bankinter SA from declines last week. Spanish banks’ average estimates suggests zero revenue growth in 2021, followed by 1% in 2022, according to Bloomberg Intelligence. That compares with 1% next year and 2% the following year for European banks.

The outlook is partly due to Spanish banks’ greater focus on lending compared with European peers, leaving them more exposure to low rates and asset-quality deterioration from the pandemic, according to BI’s Gunchev.

Weaker Buffers

Spanish banks also lag when it comes to capital buffers, which are important to absorb higher loan losses and to protect coupon payments on their riskiest bonds, known as CoCos. The country’s lenders had an average common equity tier 1 ratio of 12.25% in the second quarter, the lowest among countries surveyed, according to European Central Bank data.

Spanish Bank Stocks in Firing Line of Loan-Focused Earnings

“Spanish banks’ pre-crisis level of capital was OK, but generally it’s not a strength,” said S&P Global analyst Elena Iparraguirre. This could exert pressure on some banks’ ratings, “particularly if the environment gets tougher,” she said.

Bonds Battered

Spanish bank bonds across the risk spectrum have been hit particularly hard amid this year’s volatility. Holders of Santander and Sabadell CoCos face losses of at least 9% year to date.

Spanish Bank Stocks in Firing Line of Loan-Focused Earnings

The sector may see renewed pressure as investors assess how economic damage from the virus resurgence will impact solvency, according to Tom Kinmonth, a fixed income strategist at ABN Amro Bank NV.

“Banks with lower capital ratios could see their credit spreads widen this week,” he wrote in a note. “Spanish-focused banks could be included on this list.”

©2020 Bloomberg L.P.

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