Spanish Banks: Attractive Valuations But Fragile Trading

Eight Spanish banks brands amongst the 500 most valued worldwideThe first quarter was particularly damaging for the banking sector, coinciding with the start of the coronavirus crisis

The Q418 results have been a negative catalyst for Spanish banks and almost all of them (with the notable exception of BBVA) have seen how the stock market advances accumulated over the course of the year have vanished to the point of returning negative.

The recurrent tendencies of incomes have remained moderately positive, as happened in 2018, but, in opinion of Santander Research, net financial margins remain vulnerable.

In general, capital generation has not been especially strong and some investors are worried about adverse regulatory factors (IFRS 16, the specific revision of internal models or TRIM), as well as the larger capital positions indicated by the banks.

The expectations of the management teams have been moderately positive, but it is unlikely that they will inspire upgrades in the consensus profits forecasts.

Santander Research believes that, although valuations are attractive (all banks, except Bankinter, are trading below the value of net tangible assets), the stock market evolution of the sector will remain fragile due to weakening of the momentum in profits, sustained regulatory pressure and the risks ongoing litigation.

A positive result in the oral hearing in the case against the mortgage index of reference IRPH, which begins on 25 February, would eliminate a significant pressure on the sector, which could also happen with more positive macroeconomic forecasts, which could reinforce expectations of increases in interest rates.

Meanwhile, the names which the analysts like most remain: Caixabank (we think the market has adopted an excessively negative view of this bank and it is possible that there will be positive surprises in the costs of restructuring) and Liberbank (merger with Unicaja and significant progress in the reduction of balance sheet risk). The firm also maintain a positive recommendation for BBVA which offers, at an attractive valuation, exposure to an improvement in the fortune of emerging markets, good results in Q418 in its principal geographic markets and strengthening in the base capital.