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Spanish Bank Valuations Cheap but Balance Sheets are Weak

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Exane BNP Paribas has released a gloom and doom analysis of Spanish banks that takes out excerpts from the famous Spanish literature, ‘El Quijote’, to convey how this sector can take an even greater turn for the worse. It rates all Spanish banks to ‘Underpeform’ without exceptions. The ratings and target prices are still the same, except for Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA), which has been lowered to Underperform from Neutral. The analysis sees no medium or long term value in share prices of any companies that are covered, and it also predicts that the crisis will be ongoing for longer than expected. The ratings include banks like Banco Santander, S.A. (NYSE:SAN) (MYSE:SAN), CaixaBank SA (MCE:CABK), BANKIA SA (PINK:BNKXF), Banco Popular Espanol SA (MCE:POP), Banco de Sabadell SA (MCE:SAB), BANESTO BANCO ESPNL S/ADR (PINK:BNSTY), and Bankinter SA (MCE:BKT) (PINK:BKNIY).

Exane BNP Paribas rates the banking sector on a sustainable Return On Tangible Equity (ROTE) approach. By these calculations, the report expects the banking sector to generate returns lower than their capex for the next three years, except in the case of SAN and BBVA, which will be able to equalize the gap. The Spanish banks covered by Exane BNP Paribas are all trading at a historically low P/TE (average of 0.9x 2013e). The ROTE has lost 70 percent of its value in the last four years.

Spanish Bank Valuations Cheap but Balance Sheets are Weak

The analysis also mentions how Spain’s National Statistics Institute has lowered the GDP growth figures , the economy is now contracting at an annual rate of -1.3 percent. For 2012 and 2013, the analysis expects a contraction in GDP of -1.3% and -1.6%, respectively. It also notes that despite of showing minimal positive GDP growth in the last quarters, the overall GDP growth is still negative. Spain will have to increase jobs by >2 percent in 2013.

The report sees deleveraging in the housing sector as a significant threat, owing to the present decline in growth. The only workable scenario that is offered, is when fiscal policy maintains an accommodative stance. The analysis is wary of the fiscal austerity measures that are being implemented. Long term reforms are needed, and these will be productive only in a future based scenario. For the present, only bad things are happening for Spain. The report contends that the ECB could have helped Spain more, if it had been given an official loan from EFSF/ESM in the recent ECB policy that was announced.

The data also indicates weak consumer spending and slow industrial growth. The only sectors that are showing any improvement are tourism (up 3 percent y-o-y) and exports.  Unemployment is also noted as the key problem that is faced by the Spanish economy. By the end of June, the unemployment was at 24.6 percent. The number of unemployed is not at its highest yet, with 5.7 million people currently out of work. The unemployment in immigrants, which makes up 15 percent of the workforce, is particularly higher at 35.8 percent. The creation of jobs has been negative at -4.8 percent y-o-y for the past 5 years.



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