Spanish Banks Earnings Season
31 July 2017 by Felipe Villarroel
It is earnings season at the moment, which is a good time to reassess our views and see how our investment theses have played out. Generally this season has been positive for investors, which should be of no surprise given the strength in economic macro data year-to-date. Banks have benefitted from this supportive backdrop enabling most of the major players to exceed expectations, with the Spanish lenders being worthy of highlighting. The majority of Spanish banks had an encouraging 2nd quarter, reflecting a strong macro environment that has been in place for many months. However, it is also worth noting that this was the same quarter where there was the failure of Banco Popular, a bank with a €150bn balance sheet, which gave us the first chance to see the new resolution regimes in action. Encouragingly, the market treated this as an idiosyncratic event with no sign of any contagion across the rest of the sector.
Generally, asset quality is improving, capital levels are stable to slightly up and management continue to target increasing capital ratios. Santander, who acquired the assets of Banco Popular, managed a successful capital raise that largely offset the negative capital impact of the transaction. In terms of profitability the picture looks encouraging with most banks exhibiting improvement in their Net Interest Income (NIM) and the bottom line profit. The key exception was Bankia, who downgraded their NIM forecast for 2017. Those Spanish lenders with international operations also benefited from the improving global macro environment, with the Latam operations of Santander and the Turkish operations of BBVA adding to the bottom line.
We were interested in Sabadell’s results following their first AT1 issue in the 2nd quarter, and were encouraged to see NPL ratios continuing to decline with the latest number reported as 7.16% (5.62% including the TSB subsidiary), down from 8.54% a year ago and outperforming management’s targets. NPL coverage remains reasonable at 51% and the management have completed a number of key asset sales, which will result in improving the CET1 ratio from the current 12.1% to 12.5% once the asset sales are taken into account. In addition the issuance of their first AT1 helps to improve their total capital ratio and key leverage ratio.
In conclusion the Spanish banks’ earnings season has to be viewed as a success and reaffirms our positive view of the sector. Macro indicators continue to improve and in general the key lenders are showing positive trends across the board. We look forward with optimism.
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