Spanish banks: The sun is back but not for everyone yet

Here we analyse why the debate could move forward to why there is no SME lending growth, how much corporate credit spreads will shrink, which banks will likely suffer the most and the impact from additional provisions on legacy RE assets highlighted by the AQR even if all listed banks pass as we expect.

This debate should lead to further EPS downgrades for banks such as Popular, Sabadell and a bit less for Caixabank, while NIMs should suffer less for Bankia & Bankinter and their cost of risk should normalize at 30-40bp already in 4Q14 leading to high single digit csus upgrades. SAN & BBVA should also benefit from Euro depreciation, synergies from recent integrations & growth from Mexico, even if less impressive than anticipated it is still double digit growth with c20% ROEs.

We upgrade Bankia to Buy trading on 1.1x NAV15e & 0.8x adding back its unrecognized deferred tax assets; P/BV PT unchanged at €1.6. Stock is down c20% off the peak and offers a good entry point in our view. It has the cleanest B/S credit quality wise and should benefit most from lower deposit cost which should translate into 11% ROE and a c4% cash dividend in 2015.

Capital is solid (11.5% fully loaded 4Q15e). We see upside risk to consensus EPS15e for BBVA, capital remains solid and valuation looks inexpensive on 1.2x NAV15e. Mexican banks remain our preferred exposure in the EM space, hence we reiterate our Buy & SoP-based €10.1 PT. Although we see sound earnings momentum for Bankinter & Santander, we keep our Neutral ratings on tighter valuations while we remain Sellers of Sabadell and Neutral on Popular and Caixabank.

On average we are cutting our estimates by 8% for 2014/16 EPS for the domestic banks on lower SME growth than previously anticipated. Provisions are set to remain high in 2015 and lower contribution from carry trades should offset lower cost of deposits. We now expect a 6% ROE for 2015e reaching double digit by 2017. On the other hand we are revising upwards EPS15/16e for BBVA & SAN by 6%.

Prefer BBVA (Buy, €10.1 PT) among international banks & Bankia (Buy, €1.6 PT) among domestic players.

In short we expect all the listed Spanish banks to pass both the AQR and stress test and only a few unlisted banks, formerly cajas, could fail, but not posing any systemic risk. Although we expect all to pass comfortably, even if deferred tax assets are not fully accounted for, we also believe that the provisioning shortfalls that some banks are likely to show will be required by the market to be fulfilled over the next few quarters leading to further earnings downgrades for the domestic players, especially those still highly exposed to legacy real estate assets. Hence passing the stress test is just the beginning of the debate for some banks in our view, even if the initial market reaction is likely to be positive.

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