Spanish stocks, this year’s worst-performing developed market, are an attractive investment as overseas revenue insulates companies such as Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA from the euro-area recession, BNP Paribas Investment Partners said.
“Of all the markets we’re most overweight on, from a country point of view, it’s Spain,” said Daniel Hemmant, senior portfolio manager of European equities at BNP Paribas, which manages 502 billion euros ($664 billion). “If you look at the two largest Spanish lenders, they’ve got significant overseas earnings. We own a number of companies that are listed in Spain, which are very international in nature and have maybe 10 percent of revenue coming from Spain.”
Spain’s benchmark IBEX 35 Index declined 1.9 percent this year through yesterday’s close, the biggest drop among 24 developed markets tracked by Bloomberg, as the country’s regulator lifted a short-selling ban and Prime Minister Mariano Rajoy denied corruption allegations. That compares with a gain of 1.9 percent for the Stoxx Europe 600 Index and a 9.7 percent rally for Greece’s ASE Index.
Valuations on the IBEX 35 have fallen to 11.1 times estimated earnings from 23.5 times in November, according to data compiled by Bloomberg.
Spanish lenders are setting aside provisions ordered by the government to cover real-estate losses stemming from the country’s property-market crash. The process has favored larger banks that can rely on revenue from businesses outside Spain, Hemmant said.
“Those two banks in particular generate enough profitability to be able to write down whatever more bad loans come through,” Hemmant said at a press briefing in London yesterday, referring to Santander and BBVA. “It’s just a question of over what period they’ll do it. We’re a long way into the provisioning cycle. Optimistically, maybe we saw the trough last year.”
BBVA earned at least 70 percent of revenue in 2012 from markets outside Spain, including Mexico and the U.S., according to data compiled by Bloomberg. Santander got 53 percent of sales from Latin America and 11 percent from the U.K.
In Europe, equities have more room for growth as bank earnings recover even as gross domestic product drops, according to Hemmant. The euro region’s economy is forecast to contract for the first three quarters of 2013, according to projections from 32 economists compiled by Bloomberg.
The 46 members of the Stoxx 600 Banks Index will report a combined 16.15 euros a share in profit in 2013, after posting per-share losses of 4.09 euros last year, data compiled by Bloomberg show.
“Banks spent the last four to five years writing down the bad loans and we’re getting to the end of that process,” he said. “Even if you’re not optimistic about European GDP growth, the reality is that bank earnings are inevitably going to start picking up just as provisions normalize.”