Spain's Banks Disappoint Investors Even as Economy Heals

  • Low interest rates and competition to lend drag on revenues
  • Banco Santander to report third-quarter earnings Oct.29

For investors betting on Spain’s economic recovery, banking stocks have proved a disappointing bellwether.

While Italian bank shares have soared this year, Spanish lenders including CaixaBank SA and Banco Popular Espanol SA have posted double-digit declines. Banco Santander SA, Spain’s biggest lender, has dropped 28 percent this year, the worst performer in the Euro STOXX banks index apart from National Bank of Greece SA.

A combination of low interest rates, increased competition for loans and the overhang from a credit boom that was in full swing a decade ago is making it hard for lenders to show profit momentum. Santander and Banco Bilbao Vizcaya Argentaria SA, Spain’s multinational lenders, have also been hit by declining currencies from Brazil to Mexico and Turkey.

“The current scenario of low interest rates, spreads compression and no lending growth (together with the intensification of the emerging markets crisis) has led the sector to a more cautious stance towards the future,” JB Capital Markets analysts Juan A. Tuesta and Maria Paz Ojeda said in a note to clients this month.

Bankinter SA’s said Thursday net interest income, or the difference between what a bank charges for loans and pays on deposits, dropped 2 percent in the third quarter from the previous quarter. Santander reports earnings Oct. 29 and BBVA a day later.

Net interest income will be the main focus of earnings as analysts probe for signs of continued pressure on loan pricing with interest rates close to record lows, Fabio Mostacci, an analyst at Mirabaud Securities, said in an Oct. 14 note to clients.

A reduced contribution from the bond portfolios will also squeeze net interest income after some banks sold off debt holdings in the second quarter to book capital gains, said Mostacci. “We anticipate that the market perception of a lack of core revenue growth will be confirmed,” he said.

These five charts illustrate some of the main headwinds Spanish banks face as the earnings season gets under way:

The European Central Bank bond-buying program has pushed down the 12-month euro interbank offered rate, or Euribor, the benchmark for most of Spain’s mortgage and corporate loans. The rate dropped to a record low 0.161 percent in August from a peak of 5.39 percent in 2008.

Santander Chief Executive Officer Jose Antonio Alvarez told analysts on July 30 that there was a “fierce competition” to lend to customers in Spain. That battle among banks to win more business has made lenders lower what they charge for new mortgages and loans to small and medium size companies.

Spain’s economy is set to grow 3.3 percent in 2015 according to government estimates. Even so, demand for credit remains subdued in an economy still laboring under unemployment of more than 22 percent and a 1.33 trillion-euro credit load that built up during the Spain’s real estate boom that turned to bust in 2008. “There is too much supply and not enough demand for credit,” Nicolas Walewski, who manages about 10 billion euros at Alken Funds, said Thursday in Madrid.

Spanish lenders have been reducing the cost of deposits which has compensate for the dropped on profit they get from lending, helping them balance their net interest income. The reduction of this costs has a limit which might be near, as banks executives have said they will not charge clients to hold their deposits.

Banco Santander and BBVA relied on their businesses in emerging economies in Latin America to helped them navigate Spain’s five-year slump before growth returned in 2014. That shield is becoming a burden as the Brazil’s economy shrinks and currencies weaken from Colombia to Chile. Banco Santander makes one third of its profit from Brazil, while BBVA is betting on growth in Turkey, where the lira has plunged 14 percent against the euro this year.

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