May 6 (Bloomberg) -- Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA sustained profits through the credit crisis and earned a combined 3.5 billion euros ($4.5 billion) in the first quarter. That hasn’t stopped investors from punishing their shares as Greece’s debt crisis threatens Spain.
Investing in Spanish banks “seems a bit like standing in front of a train,” said Andrea Williams, who helps manage about 1.1 billion pounds ($1.7 billion), including Santander and BBVA shares, at Royal London Asset Management in London. “People are concerned that Spain is the next country at risk.”
Santander and BBVA, Spain’s largest banks, reported earnings that beat analysts’ estimates last week and said Spanish bad loans were stabilizing. Investors turned a deaf ear, as speculation that the Greek woes may infect debt-ridden Portugal and Spain outweighed the results, said Sadri Tamarat, a fund manager at Paris-based Shanti Asset Management, which oversees about 350 million euros.
“The game is ‘how do you short Spain?’ and the answer is you sell the main stock index and the two main banks,” Tamarat said by phone yesterday. “The move has been extreme and maybe it’s more about panic.”
Santander fell 12 percent this week, wiping 9.5 billion euros off its market value, on doubts that the 110 billion-euro bailout of Greece by the European Union and International Monetary Fund will contain the region’s debt crisis. BBVA also slumped 12 percent, cutting its market value by 4.5 billion euros.
Santander declined 27 percent in 2010, and BBVA dropped 31 percent.
Investors are leery of Spain because of its shrinking economy, 20 percent unemployment rate and fiscal deficit, which may exceed Greece’s as a percentage of gross domestic product this year, according to the European Commission, the EU’s executive arm. Standard & Poor’s cut Spain’s credit rating on April 28 and Moody’s Investors Service said yesterday it may lower its rating for Portugal.
Spain’s deficit will decline to 9.8 percent of GDP from 11.2 percent in 2009, while Greece’s will drop to 9.3 percent from 13.6 percent, the commission estimated yesterday.
Spanish Prime Minister Jose Luis Rodriguez Zapatero dismissed speculation the country would need a bailout as “complete madness,” in comments at a news conference in Brussels on May 4. Spain has been mired in its worst recession in 60 years, and the Bank of Spain projects GDP will shrink 0.3 percent this year.
The extra yield investors demand to hold Spanish 10-year debt rather than German bunds, Europe’s benchmark securities, has surged to its highest level since the single currency was introduced. Spain’s IBEX stock index has dropped 8.2 percent this week, extending this year’s loss to 19 percent.
‘Not Just Proxies’
“Spanish banks are not just proxies -- they are seen as a core part of Spanish risk and the Spanish economy,” said Matthew Maxwell, a European bank credit analyst at Societe Generale SA in London.
A spokeswoman for Santander, who asked not to be identified in line with company policy, declined to comment in a phone interview. A spokesman for BBVA also declined to comment.
While Spain’s property crash forced up loan defaults, Santander and BBVA skirted the worst of the credit crisis that triggered $1.77 trillion in losses and writedowns for the global banking industry. Santander took advantage of the downturn to snap up businesses in the U.K. and Germany.
“It doesn’t seem altogether fair,” said Maxwell. “Santander is one of the few global banks that has actually emerged from the subprime crisis as a real winner.”
The bank, based in Santander, has lined up 45 billion euros in customer funds and the proceeds of debt sales to cover 29 billion euros in debt maturities this year, Chief Executive Officer Alfredo Saenz said last week. Earnings rose 5.7 percent to 2.22 billion euros in the first quarter as Brazil and the U.K. countered a slump in Spanish profit.
BBVA has arranged at least 80 percent of its financing needs for 2010, the Bilbao-based lender said last week. Bad loans as a proportion of total credit stabilized, it said.
“The higher the perception of risk, the harder it will be for the Spanish banking system to show it’s functioning normally,” said Daragh Quinn, an analyst at Nomura International in Madrid. “That’s vitally important because these banks have to finance themselves externally.”
Santander has about 24 billion euros in Spanish, 3.3 billion euros in Portuguese and about 200 million euros in Greek debt, Chief Financial Officer Jose Antonio Alvarez said. BBVA had “immaterial” holdings of Greek and Portuguese debt, while Spanish bonds made up a third of its 27 billion-euro bond portfolio, CFO Manuel Gonzalez Cid said.
Absorbing the Impact
Even in the event of a default by Spain that resulted in a 50 percent “haircut” for bond investors, both banks could probably absorb the impact to their capital base, said Arturo de Frias, an analyst at Evolution Securities Ltd. in London.
“Banks do tend to hold big sovereign bond portfolios so when government bonds fall, they tend to do the same,” said John Yakas, who helps manage 150 million pounds at HIM Capital Ltd. in London.
While both banks have a diversified business, investors will also look at how much they rely on Spain, said Williams.
Santander had gross exposure to credit risk of 437.7 billion euros for Spain, equivalent to about 40 percent of its total risk, according to its annual report published on April 30. Spain and Portugal account for 40 percent of BBVA’s total assets by business area, according to the bank’s 2009 annual report.
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