BBVA Assertion That Worst Is Over Tested as Spain Faces Economic Slowdown

Banco Bilbao Vizcaya Argentaria SA (BBVA) faces a test of its 18-month-old assertion that defaults have peaked as growth stagnates in a Spanish economy that still accounts for about 60 percent of its loan book.

“Maybe they can keep this line going that bad loans have peaked for a bit longer but we all know things have got worse,” said David Moss, director of European equities at London-based F&C Investments. “They may have been better lenders than other Spanish banks but they can’t escape the market they’re in.”

Spain’s second-biggest bank has brought down its bad-loans ratio in the country after Chief Operating Officer Angel Cano said in April 2010 that asset quality was probably going to be “stable from now on.” While Chairman Francisco Gonzalez reiterated in February that the “worst was over” for BBVA, a deteriorating economic outlook will push up bad loans, said Moss, who holds the bank’s shares as part of the 8.5 billion euros ($11.8 billion) in non-U.K. equities he manages at F&C.

BBVA may say third-quarter earnings dropped 24 percent to 861 million euros when it publishes results tomorrow before the market opens, according to the average estimate in a Bloomberg survey of five analysts.

The bank was among Spanish lenders that had their debt ratings cut on Oct. 11 by Standard & Poor’s, which cited concerns about a “dimming” outlook for the economy and the prospect that bad loans will keep accumulating during 2012 and potentially into 2013.

Question Marks

Moody’s Investors Service cut Spain’s debt ratings for the third time since 2010 on Oct. 19, citing concerns about a “fragile” banking industry whose asset quality is being harmed by difficult funding and economic conditions. BBVA was among Spanish lenders whose debt ratings were cut after the sovereign downgrade.

BBVA “stabilized the bad loans but there are some question marks for the future as the crisis goes on,” said Helmut Hipper, a fund manager at Union Investment in Frankfurt, which has 177 billion euros under management. “Can they keep things stable? I don’t know if they can.”

A spokesman for Bilbao, Spain-based BBVA, who asked not to be named in line with company policy, declined to comment in a phone interview.

BBVA’s expectation that bad loans have stabilized stemmed from the bank’s anticipation of writedowns on a loan book that was less exposed to Spanish real estate than many of its domestic rivals.

Writedowns

For the fourth quarter of 2009, BBVA reported a 94 percent drop in profit after taking a writedown for goodwill attached to its U.S. business and set aside money for bad loans. The aim of the exercise was to “clear the future and not permanently be seeing quarter-by-quarter new peaks in defaults,” Cano said at the time.

BBVA is also less exposed than other Spanish banks to the country’s property crash because it lent less to developers relative to the size of its balance sheet. Souring loans to developers made during Spain’s decade-long property boom have been the catalyst that has driven the bad-loans ratio for the country’s banking system above 7 percent, the highest level since 1994, as lenders booked more than 100 billion euros of provisions against defaults since 2008.

BBVA’s risk from loans to construction and real-estate activities stood at 15.7 billion euros at the end of June compared with 16.6 billion euros six months earlier, according to company filings. About 39 percent of the June total is listed as impaired or “potential problem” assets.

Lower Ratio

Still, at about 4.4 percent, loans to developers as a proportion of total lending is lower at BBVA than other Spanish banks. The ratio at Banco Popular Espanol SA is almost 18 percent and 16 percent at Bankia, according to an analysis by Exane BNP Paribas.

BBVA’s overall bad-loan ratio has been little changed at about 4 percent for the past six quarters. The ratio at its Spanish business dropped to 4.7 percent in June from 4.8 percent in March and 4.9 percent a year earlier.

The prospect of more loan defaults for Spanish banks is set against the background of the debate over how much capital European lenders need to absorb losses. BBVA closed the second quarter with a core capital ratio of 9 percent, lower than larger Spanish rival Banco Santander SA (SAN), which on Oct. 21 announced plans to sell a stake in its U.S. auto-loan business to bolster its balance sheet.

Slowing Economy

BBVA’s bad-loans forecast doesn’t take into account a Spanish economy that is slowing sharply as the European debt crisis squeezes the availability of credit and increases its cost, said John Raymond, an analyst at CreditSights Inc. in London. Funcas, the research arm of Spain’s savings-bank association, forecasts the economy will “practically stagnate” in the second half of this year, leaving the full-year growth rate at 0.7 percent.

There are signs that BBVA is taking steps to prepare for a worsening economic climate that will lead to a wider deterioration of assets on its books.

In July, Cano told analysts that the bank had “subjectively” classified 450 million euros of Spanish mortgage loans as in default. That contributed to a jump in loans newly classified as impaired to 3.7 billion euros in the second quarter from 2.8 billion euros in the preceding three- month period.

“The loan losses are going to keep on coming in and I think people might have lost sight of that a bit,” Raymond of CreditSights said in an interview. “The big issue for the Spanish banks is still asset quality and nothing has changed in that respect.”

To contact the reporters on this story: Charles Penty in Madrid at cpenty@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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