Spain Bank Rally May Be Unsustainable, BoFA, Nomura Say

A rally by Spanish banks such as Banco Popular Espanol SA (POP) and CaixaBank SA (CABK) may be unsustainable unless the outlook for earnings improves, Bank of America Corp. and Nomura Holdings Inc. said.

CaixaBank surged 14 percent this year, more than double gains for the benchmark Stoxx Europe 600 Banks Index, even after the average analyst estimate for earnings in 2014 slumped to 1.2 billion euros ($1.6 billion) from 1.8 billion euros predicted 12 months ago, according to Bloomberg data. Banco Popular jumped 20 percent as its 2014 earnings estimates slid to 593.2 million euros from about 800 million euros.

“We think now is time for banks to deliver on quality earnings that can support current market multiple premiums versus the sector,” Bank of America Corp. (BAC) analysts Sergio Gamez and Tarik El Mejjad said in a report published today. “At today’s share prices, we think the banks need now to show how the economic recovery will translate into real earnings and how such earnings compare with market expectations.”

Spanish banks’ shares have increased as the economy emerged from a five-year slump and a rally in sovereign debt pushed borrowing costs down. Still, weak demand for loans and rising default rates even as costs of deposits ease have made it hard for banks to boost profit.

Having converged with the European banking industry at 0.9 times tangible book value last summer, Spanish banks are trading at 1.3 times that measure and at a 10 percent premium to the industry, Rohith Chandra-Rajan, an analyst at Barclays Plc (BARC) in London, said in a report last week.

Default Pressure

Meanwhile, Spanish defaults rose to a record of 13.1 percent of total loans in November compared with 13 percent in October and 11.4 percent a year earlier, the Bank of Spain said last week. Unemployment in Spain is still at 26 percent even as the economic recession abated.

“Returns for the domestic banks in Spain will remain relatively weak,” Daragh Quinn, analyst at Nomura in Madrid who has had a sell recommendation on Popular since at least 2008, said by phone. “We should see some improvement from 2013 but not enough to justify current valuation levels.”

Merrill recommends clients sell six of the seven Spanish banking shares it covers, including CaixaBank and Banco Popular. Nomura says sell five of seven, including Banco Popular and Banco Bilbao Vizcaya Argentaria SA (BBVA), the country’s second-biggest bank. It says hold shares of CaixaBank and Banco Santander SA (SAN), Spain’s largest.

Paying Premium

Investors may be ignoring banks’ near-term troubles for long-term gain, said Gonzalo Lardies, a fund manager at Banco Madrid Asset Management, which has about 2 billion euros of stocks and bonds under management.

“The prices that people are paying based on earnings estimates look quite high,” he said in a phone interview. “Investors seem to be prepared to pay a premium now to position themselves for the medium to long term.”

Spanish banks have increased as the yield on Spain’s five-year bonds fell to 2.25 percent from a peak of 7.6 percent in July 2012, according to Bloomberg generic prices.

The bond rally has opened the door for banks to tap the debt markets this year with Bankia SA (BKIA) raising 1 billion euros this month with its first issue of senior bonds. Popular said on Jan. 13 that it raised 500 million euros with a sale of three-year senior debt.

Bankia became a symbol of the woes in Spain’s banking system in 2012 when it was nationalized after losses linked to real estate forced it to take bailout funds totaling 22 billion euros. Investors have expressed interest in buying a stake in the lender, Deputy Economy Minister Fernando Jimenez Latorre said last week.

“There has been a growing conviction that the sovereign risk is solid with all the implications that has for the solvency of the banks,” said Josep Prats, a fund manager at Abante Asesores Gestion in Madrid, which has 1.3 billion euros in stocks and bonds under management. “The question now is when they are going to reach a normalized level of profit.”

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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