Consensus divided over Spanish banks Q1’17 results

Spanish banksBank of Spain

Fernando Rodríguez | The first quarter results from the Spanish banks have fuelled rises in the majority of their stock prices. But analysts are divided over a sector which is showing some light: the impact of interest rates; fewer provisions; business improvements, as well as a few shadows: weak profitability; new capital requirements.

Banco Popular was the last bank to present results. Last Monday, Banco Santander analysts issued a report, saying the Spanish banking sector is one of those with the best short-term outlook and is a strategic investment: “Low interest rates and sparse lending growth, added to political instability, hit the sector in 2016. Our outlook for 2017 is positive, with valuations which are still interesting, while the weak fundamentals are already discounted in the market.” Santander analysts recommend buying Bankia, with a target price of 1,15 euros, and CaixaBank, “where the target price is still under revision”.

Along the same optimistic lines, Bankinter analysts have substantially improved their forecasts for the two sector leaders – Santander and CaixaBank.

The results of the first quarter of this year “allow us to identify some of the main trends which could affect future results,” according to the monthly note sent to participants in the 1962 Capital Sicav fund by its CEO and manager Ofelia Marín-Lozano. These trends include the transfer of time deposits to accounts with fewer charges, the stabilisation of client margins after years of declines, the increasing amount of off-balance sheet products being obtained which bring in commissions, the adjustment to operating costs – where there is still more room for action – and lower provisions: due both to the fall in NPLs and the restructuring of loan portfolios. Marín-Lozano is very confident about the sector.

“It’s been the hardest hit in the last 5 or 6 years, and the cash from fixed income, which offers a low yield, will transfer to this sector,” she says.

And she doesn’t think the banks’ share price ratios are too high at the moment. “With the exception of Bankinter, all the lenders are trading below book value. Their ROE is not very high, but will clearly improve.” The key to this improved profitability and the strong rise in the banks’ share prices is the expected positive trend in interest rates.

In her note, Marín-Lozano also flags that :

“The return of the Euribor to positive levels, which should necessarily happen in no later than one year’s time, against a backdrop of a normalistation of interest rates, would lead to a substantial rise in profitability. To the extent that it would have an immediate repercussion on most of the banks’ assets – two thirds of their loans are variable rate mortgages – and only a partial impact on liabilities, given the migration which has happened from term deposits to current accounts and investment and insurance funds.”

But, there are also doubts about the banks’ future stock market performance. Xabier Brum, Fidentis fund manager, believes that “the shares are trading at 1x P/BV and ROEs of 10%.” Although he thinks the banks “have been doing their homework”, he has doubts over the visibility and consistency of their results:

“I would have liked to have seen 50-60% of the improvement in earnings coming from the core banking business, but my fear is that the ROEs are ‘winter flowers’. You have to differentiate between the net interest income margin from the core business and the yields obtained thanks to their portfolios’ peformance, the decline in provisions and other non-recurrent resources.”

Jesús de Blas, fund manager at Bankoa CA Banca Privada is also cautious. He believes that “there is a lot of discrepancy between the consensus target prices for the banks and some very striking exceptions.” He is referring to the foreign firms: Germany’s Berenberger – which has buried BBVA’s target price at 3 euros; or the US firm Jeffries, which has cut its target price for Santander to 4,10 euros per share. De Blas prefers to be cautious, given that:

“The rises in the share prices in the last three months due to the favourable outlook for interest rates have pushed the banks very close to their right price. A lot of the positive expectations are already in the prices. Furthermore, there is not enough visibility on what the banks’ recurrent earnings will be like, discounting elements like provisions or surprises such as the ruling on the floor clauses.”