BBVA Bad Loans Stabilize as Profit Little Changed

Banco Bilbao Vizcaya Argentaria SA, Spain’s second-biggest lender, said bad loans stabilized as higher earnings from wholesale banking kept first-quarter profit little changed.

Net income was 1.24 billion euros ($1.64 billion), compared with 1.238 billion euros a year earlier, the Bilbao, Spain-based bank said today. That beat the median 1.17 billion-euro estimate in a survey of 10 analysts.

The bank’s reliance on Spain as the biggest source of profit has caused concern as the country strives to emerge from recession and struggles to rein in its own budget shortfall after Greece sought emergency aid. Bad loans stabilized after the bank run by Chairman Francisco Gonzalez reclassified lending in the previous quarter in anticipation of further losses.

“These are quality results in a difficult environment with the control of loan quality a good surprise,” said Pablo Garcia, head of equities at Oddo Sociedad de Valores in Madrid. “The problem is that the outlook for funding for the Spanish banks is starting to cloud over because of the situation in Greece and that’s a wider concern.”

BBVA fell 4.8 percent to 9.61 euros in Madrid, extending this year’s decline to 25 percent. The 52-member Bloomberg Europe Banks and Financial Services Index has dropped 3.1 percent while Banco Santander SA, Spain’s biggest bank, is down 21 percent.

Bad Loans Stable

BBVA’s bad loans were 4.3 percent of total lending, unchanged from December. Non-performing assets on its books climbed to 15.9 billion euros from 15.6 billion euros in December and 10.5 billion euros a year ago.

The results show BBVA’s bad loan ratio “is probably going to be stable from now on,” President and Chief Operating Officer Angel Cano said on a Webcast for analysts today.

BBVA reclassified 1.8 billion euros of still-good loans as doubtful in the fourth quarter of 2009 as the bank anticipated future losses. Total loans newly classified as bad fell to 3.3 billion euros from 6.2 billion euros in the fourth quarter.

“We question whether this marks a turnaround in the credit cycle for the company,” said Andrew Lim, an analyst at Matrix Corporate Capital LLP in London who rates BBVA “sell,” in a note to investors. “Increasing sovereign debt risks, as we have been seeing recently, will drive further deterioration in asset quality and prompt contraction in margins and loan growth.”

‘Almost Immaterial’

Spain had its credit rating cut one step by Standard & Poor’s to AA today and credit-default swaps on European sovereign debt surged to records. Contracts tied to Greek government bonds climbed 111 basis points to 821 while those in Portugal rose 54 basis points to 365, according to CMA DataVision. A basis point is one-hundredth of a percentage point.

BBVA’s holdings of Greek and Portuguese debt are “immaterial,” Cano said.

“Even in a very negative scenario, we wouldn’t have an unmanageable impact either through the cost of funding or the effect on underlying gains on our portfolios,” Chief Financial Officer Manuel Gonzalez Cid said. “Actually I’d say it would be almost immaterial.”

Profit from Spain and Portugal declined 6.5 percent to 587 million euros, the bank said today. Bad loans were 5.1 percent of total lending in Spain and Portugal, unchanged from December.

BBVA earned 45 percent of its 2009 profit from Spain and Portugal while retail banking in the region accounted for 37 percent of earnings at Santander.

Margin Squeeze

Lenders in Spain face a squeeze on margins as defaults mount, credit demand flags and loan books re-price to reflect lower interest rates. Spain has been in a recession since the second quarter of 2008, and the Bank of Spain projects gross domestic product will fall 0.3 percent in 2010.

Earnings from Mexico fell 4.2 percent to 347 million euros. The International Monetary Fund last week raised its 2010 economic growth forecast for the country to 4.2 percent from 4 percent.

BBVA is targeting growth in Mexico, its second-biggest market, and the southern U.S., where it’s developing a franchise built on the $9 billion purchase of Birmingham, Alabama-based Compass Bancshares Inc. in 2007.

Profit from wholesale banking and asset management climbed 20 percent to 284 million euros and earnings from South America rose 14 percent to 233 million euros. Earnings from the U.S. fell 22 percent to 54 million euros.

First quarter net interest income climbed 3.5 percent to 3.39 billion euros while trading income jumped 74 percent to 633 million euros, the bank said.