Spain is setting the pace as the fastest-growing major economy in Europe as Banco Bilbao Vizcaya Argentaria SA outperforms the region’s banking industry still reeling from the financial crisis.
More bullish investor sentiment toward the nation, even as Greece’s bailout negotiations threaten the future of the currency bloc, has helped banks lower funding costs. Three years after a rescue of some financial firms, BBVA, the second-biggest Spanish bank, and Banco Santander SA, the largest, have been cleansing books after losses on souring loans and say they want to increase lending, bolstered by central-bank liquidity.
Santander, a lender with a balance sheet the size of the country’s economy, is on course to increase earnings by almost two thirds by 2017, analysts estimate. The improvement is backed by growth that the government predicts will reach 3.3 percent this year and 3 percent in 2016.
The improving health of the country’s banks is helping to buoy expansion that will outpace that of Germany and France after the government also revamped labor rules to make the economy more competitive and cut taxes to boost consumer demand.
“Spain is one of the countries that has best done its homework,” said BBVA Chairman Francisco Gonzalez, 70, in Madrid. “That is the general impression that people tell me in different events and countries that I visit.”
Credit-default swaps on Banco Santander, at a record 488 basis points mid-2012 when Spain’s debt crisis was at its peak, were at 95 basis points on Thursday, a sign of the improvement in the lender’s creditworthiness. The cost of insuring against default by BBVA stood at 97 basis points.
“BBVA and Santander are benefiting from a recovery in Spain because it will help them improve their loan books and will be better for their deposits,” said Christian Sole, senior equity analyst at Candriam Investors Group in Brussels, which oversees about 90 billion euros ($98.5 billion) in assets and holds BBVA shares. “The richer Spaniards are, the better for BBVA and Santander.”
As both banks continue to mop up real estate losses in Spain that brought down other lenders, they also rely on their international business to support revenue from countries such as Brazil and the U.K. for Santander, and Mexico for BBVA.
Santander, based in the Spanish city of the same name, and Bilbao, Spain-based BBVA have the highest net interest margin among their 25 European peers and their margin is above the average for the largest 20 global banks, according to data compiled by Bloomberg. The growth of net interest margin of both lenders in the past decade is the greatest among their peers.
To be sure, Spain’s banks still face challenges as low interest rates limit domestic revenue gains at a time when the recovery in loan demand is still at an early stage and interest rates are so low, said Benjie Creelan-Sandford, an analyst at Macquarie Bank Ltd. in London.
Banks also are still burdened by 211 billion euros of non-performing assets, an amount that is set to decrease this year as the economy picks up, according to Scope Ratings.
Santander’s Spanish unit accounted for 15 percent of profit in the first quarter of 2015 compared with 11 percent in 2013. BBVA’s Spanish banking business represented 36 percent of the lender’s first quarter profit before extraordinary items compared with 33 percent in 2013.
“Spanish banks have the challenge to recover profitability, to increase their return on equity, and that, with interest rates at zero, is complicated,” Nuria Alvarez, a bank analyst at Renta 4 Banco in Madrid, said by phone. “We are going to see that challenge through 2015 and 2016 since rates are not expected to increase anytime soon.”
And while Spain is on course to repay its bank bailout, the country and its lenders are still vulnerable to concerns about the future of the euro. BBVA and Santander tumbled when investors saw Greece’s decision to ask its voters to decide on its financial package as a threat to its membership of the eurozone and rallied on news of its new bailout accord.
Santander relies for a fifth of its profit from its bank in Brazil where the economy is set to shrink by 1.4 percent this year, estimates show. Meanwhile, BBVA is dealing with the impact of Venezuela’s currency plunge as it also boosts investment in a Turkish banking market where profitability is falling.
BBVA shares are up 19 percent this year, in line with its benchmark, the Stoxx Europe 600 Banks Index. Shares in Santander, which raised 7.5 billion euros in January by selling stock, are down 3.3 percent.
Santander had return on equity of 7.7 percent last year, compared with an average 2 percent among the 46 companies tracked by the Stoxx Europe 600 Banks Index. Santander may build profitability by that measure to 8.9 percent in 2017, according to a Bloomberg survey of analysts.
“Spain went through a tough time but now we are seeing a recovery,” said Patrick Lemmens, who helps oversee about 10 billion euros in global financial services stocks at Orix Corp.’s Robeco Groep NV in Rotterdam. “A macroeconomic recovery is always helpful for banks as you see provisions reaching a peak and coming down.”