Spanish Impasse Deters Investors as Banks Trade at Crisis Levels

  • Santander breaches 2012 lows it touched before Draghi's pledge
  • Banco Popular trading at the lowest level in 25 years

Spanish banks are trading at levels last seen at the height of the country’s financial crisis as the chances of anti-austerity party Podemos playing a role in the next government rise.

Spanish lenders have been caught up the market rout hurting banks across Europe, with the government hamstrung by the result of December’s general election and Catalonia, the country’s biggest regional economy, agitating for independence. Mariano Rajoyis limping on as acting prime minister after losing a third of his seats as he tries to patch together a majority from the most divided parliament in the country’s history.

“The most important reason for Spanish banks’ low prices is indeed the indecisive vote,” said Patrick Lemmens who helps oversee about 10 billion euros in financial-services stocks at Orix Corp.’s Robeco Groep NV in Rotterdam. “The uncertainty over what’s going to happen next plus the new government in Catalonia make people reluctant to enter Spanish banks.”

An index of Spanish banking stocks has dropped 17 percent this year, while Banco Popular Espanol SA is faring even worse. Its stock has fallen almost every day this year to reach its lowest level since 1990. Banco Santander SA, the euro area’s largest lender, has breaching the lows of 2012 when Spain sought a European Union bailout for its financial system and Bankia SA, handed more than 22 billion euros ($24 billion) of taxpayer funds as part of that cleanup, is at its lowest in more than two years.

With the Socialists and Podemos set to vote against him and Catalan parties alienated by his intransigence over their bid for independence Rajoy is likely to fail, opening the door for Socialist leader Pedro Sanchez to seeking a progressive alliance with Podemos. Both parties are committed to reversing Rajoy’s labor reform and pushing the European Commission for flexibility on the budget deficit.

Market Turmoil

Spain’s political impasse has emerged as global markets are roiled by concerns about China’s economic growth, a slide in the price of oil and the prospect of the Federal Reserve raising interest rates again this year. Global stocks have dropped 11 percent this month.

Spanish banks’ declines have mirrored the declines suffered by Italian rivals such as Unicredit SpA and Banca Monte dei Paschi di Siena SpA which were forced to release details of their non-performing loans by regulators Monday. Italian lenders have match the 21 percent slump in Spanish banks since the Dec. 20 election. Europe’s biggest banks have declined 18 percent over the period.

Spanish lenders have been under pressure for months as record-low interest rates and increased competition for loans have squeezed profits. Gross margins across the country’s financial system fell to 1.7 percent of total assets in the third quarter, according to Bank of Spain, the lowest since 2011. Spanish banks are particularly exposed to shifts in central bank policy because most mortgages are tied to 12-month inter-bank lending rates.

Bank Capital

On top of that, Banco Santander and Banco Bilbao Vizcaya Argentaria SA, the country’s two biggest lenders, are operating with slimmer common equity tier 1 capital ratios than their rivals in the Stoxx Europe 600 Banks Price index, according to data compiled by Bloomberg.

Bank capital levels across the European periphery are in the spotlight as the European Central Bank scrutinizes individual banks’ bad loans. In Portugal, Novo Banco SA, the good bank that emerged from the breakup of Banco Espirito Santo SA last year, is transferring about 2 billion euros of bonds to the country’s bad bank, which is being liquidated, prompting the bonds to plunge.

“The political situation in Spain at a time when the country’s banks are run with thinner than average capital levels are driving down their stock prices,” said Francois Lavier, a Paris-based fund manager at Lazard Freres, where he helps to manage 17 billion euros of assets including Spanish bank securities. “The recent treatment of bondholders in Portugal within Novo Banco as well as the exposure of the two largest players to Latin America are also playing against the investment case.”

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