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Investors Betting on Spanish Banks Defy Gloomy Outlook

Photographer: Xabier Mikel Laburu/Bloomberg

A Bankinter office in Barcelona, Spain. Close

A Bankinter office in Barcelona, Spain.

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Photographer: Xabier Mikel Laburu/Bloomberg

A Bankinter office in Barcelona, Spain.

A surge in Spanish banks shows investors are betting the nation’s 3.4 trillion-euro ($4.5 trillion) financial industry is beginning to heal.

With Spanish banks selling bonds and starting to rebuild deposits and the country’s borrowing costs near a one-year low, investors are regaining confidence in lenders. Spain’s benchmark stock index, the IBEX 35 (IBEX), has risen about 5.7 percent this year, making it the second-best performer among major European equity markets, led by a 37 percent increase in Bankinter SA. (BKT) Banco Popular Espanol SA (POP) has gained 26 percent.

“There are a number of things that have happened in the last few weeks that haven’t solved Spain’s problems but have started to improve the overall picture,” Simon Maughan, a financial industry strategist at Olivetree Securities in London, said in a telephone interview. “All the negatives are still there but we already know all about them, while some of the other pieces of the jigsaw are starting to fall into place.”

Banco Santander SA (SAN) closed at 6.62 euros, up 0.4 percent, bringing gains this year to 8.5 percent, while Banco Bilbao Vizcaya Argentaria SA (BBVA), or BBVA, was little changed in Madrid. Bankinter fell 3.3 percent, the first drop in nine days, and Banco Popular Espanol decreased 0.7 percent.

‘Magic Spell’

The rebound in bank stocks is dividing opinions between investors that see signs of life in a financial system ravaged by real estate losses and those who see more pain to come.

An economic recession that has driven unemployment to 26.6 percent and defaults as a proportion of total lending to a record 11.2 percent are the flip side of the Spanish bank story for more pessimistic investors.

“There has been no magic spell cast and the problems have not gone away,” said Edward Thomas, who helps oversee $6 billion as head of fixed income at Quantum Global Investment Management in Zug, Switzerland. “Spain is bankrupt. They have an economy that is unable to pay its way and banks still face unknown losses.”

Thomas said he won’t seek to replace short-term debt held of Santander and BBVA, when it matures over the next six months.

Funding Conditions

To Maughan, signs that funding conditions are easing for lenders signal improving business conditions for Spain’s banking industry. Banks’ net borrowings from the European Central Bank fell to 313.1 billion euros in December, the lowest since May, from 340.8 billion euros in November, the Bank of Spain said today.

BBVA, based in Bilbao, Spain, led banks opening bond issuance in Europe this year when it sold 1.5 billion euros of five-year debt. The bonds were priced to yield 295 basis points compared with the benchmark swaps rate. That’s down from 380 basis points when it sold 1.5 billion euros of bonds due in 2015 in September, according to data compiled by Bloomberg.

CaixaBank (CABK) SA, Bankinter and Banco Popular are among banks that have followed. Popular said in November it successfully raised 2.5 billion euros from a share sale held to cover a capital shortfall revealed in a stress test of Spanish banks.

Deposits, including funds from companies and households increased 0.7 percent in November from October, the Bank of Spain said Jan. 3. Deposits are a source of funding.

ECB Pledge

The number of Spanish bank branches has fallen to about 39,000 from a peak of 45,707 in 2008 in another sign that lenders are striving to run their businesses more efficiently. Reports that the Bank of Spain wants lenders to cap the yields they offer on their deposits are also positive for banks because such a step would help rein in their retail funding costs and bolster margins, Sergio Gamez, an analyst at Bank of America Merrill Lynch, wrote in a note on Jan. 10.

“The big picture is much better because it shows the restructuring is starting,” said Maughan. Spanish lenders have also been bolstered by the decision of global central bank chiefs earlier this month to give banks four more years to meet international liquidity requirements, he said.

Spanish banks have been buoyed since ECB President Mario Draghi’s July pledge to do “whatever it takes” to defend the euro and a commitment to buy Spanish debt if the government signs up to a bailout first. Spain’s 10-year borrowing costs, which hit a euro-era record in July, touched 4.84 percent on Jan. 11, the lowest since March 1.

Skeptical Investors

Government orders to banks last year to speed up the recognition of losses on 180 billion euros of soured real estate assets signify progress for Spain’s property clean-up, as does the creation of a so-called bad bank to absorb 37 billion euros of real estate-linked assets from nationalized lenders, said Peter Braendle, who helps manage about $60 billion at Swisscanto Asset Management AG in Zurich.

“I thought I should invest in banks in general, and that I should have a play in Spain,” said Braendle, who has seen shares in Bankinter surge 45 percent since he bought them about two months ago. “Politics is working for banks. The economic situation is still a bit worrying.”

Other investors remain skeptical. Andrea Williams, head of European equities at Royal London Asset Management, said while she still holds non-Spanish banks, she sold BBVA and Santander last year and didn’t participate in the stock surge.

“I am very happy to buy the debt of banks that are supported by countries that are solvent,” Quantum’s Thomas said. “We didn’t buy Spain when it was on its knees and we are certainly not going to be doing so now.”

To contact the reporter 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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