Spain was a well-liked region within European banks until the new Government came into place. As strategists at Morgan Stanley points in a note to investors, “the negative noise around a potential bank tax and the doubts concerning the fiscal behavior of the current coalition have hit this sector.” Also, according to these analysts, the impact differs “significantly” depending on the formula they use to estimate the potential bank levy.
Spanish banks were one of the preferred regions at the beginning of the year and now their short interest bases are at year-to-date highs, this quarter is a great opportunity for them to catch up after the recent underperformance.
Santander will kick off the Spanish 2Q18 results season next Wednesday (July 25th) with all the eyes pointing to its capital position and the potential headwinds from Latam currencies. Company specific issues like Turkey (ie BBVA) and TSB (ie Sabadell) have provided more downside to some of these names. Below there are more details per stock provided by the experts:
BBVA – Despite the concerns around Turkey and Mexico the stock has done significantly well into numbers (stock up the week before results in the last 7 quarters). FX headwinds is the main concern with the strong capital position being the only buffer. The stock has a short interest level sub 2% of Free Float, short interest has remained in the 0.5%-2% range this year, Year-to-date lows were around April/May. If you look into the last 6 quarters the stock has gone up in two occasions and down the remaining, last quarter was up 2.2%. BBVA has outperformed slightly the SX7P last month (-0.42% vs -2.04%) despite the accelerated underperformance last week. The options market is pricing in a 3.2% move on the day.
Santander – In the last three months the long Santander/ short BBVA trade has lost 7%, the concerns around the capital position and its US subsidiary has driven to an accelerated selling from LO mostly in Europe. Santander is generally a winning trade into numbers with the exception of last quarter, you need to go back to 2015 to get two bad quarters in a row. The stock has a short interest level sub 1% of FF which is currently at around YTD highs, on a relative basis 1% of FF is low. If you look into the last 8 quarters reported the bank has gone down only in 1Q18 and 2Q17 results. The remaining 6 quarters has gone up something between 0.4-4.4% with the median closer to the top level. Year-to-date Santander is down 1.4% vs the sector (ie. SX7P) which is already down 12.7% YTD. The options market is pricing in a 2.5% move on the day.
Caixabank – The most consensual long among Spanish banks, even with small upgrades YTD the stock has suffered a derating with the rest of the Spanish stocks, despite the recent correction the stock trades at 1.0x PTBV. The stock has a short interest level of around 3-5% of FF, this represents YTD highs. Its short interest has been steadily climbing, started year sub 2%. Caixabank has gone up in 7 out of the last 8 quarterly reporting days, the move generally is up 0.7%-4.5%. In the last three months Caixabank is down 7.2% vs the SX7P down 9.0%. The options market is pricing in a 0.9% move on the day.
Bankinter – The best Spanish bank stock YTD is also the most expensive one, with a strong beat in commissions embedded in MSr estimates vs consensus it is difficult to see how the stock can continue going with such a weak lending growth (+1% qoq in 2Q18E). The stock has a short interest level in the 2-3% range, close to YTD highs, SI was around same level at beginning of the year, dipped sub 1% between March and May and has climbed since then. The stock has gone up in the last four quarters, the stock hasn’t managed to go up five quarters in a row since more than a decade ago. Bankinter is the third best performing stock in the SX7P YTD (BKT +8.4% vs SX7P -12.7%). The options market is pricing in a 2.4% move on the day.
Sabadell – The most hated Spanish bank in the UK after the IT issues from the TSB integration, we are all waiting for an announcement of the disposal of the majority of its NPL book (link here). Unless the price of the disposal is extremely low the stock should react well on the news. The negative news on TSB have been partially discounted, the loss of funds and clients in TSB will be the second most relevant item to watch this quarter, watch also the capital levels as the CET1 impact of BTP holdings should be relevant. The stock has a short interest level in the 3-5% range, it currently stands at YTD highs, interesting to see how the short interest started the year at lows of 1-3% range. Sabadell has gone down in seven out of the eight last reporting quarters. You have to go back more than 10 years to see the bank going down more than six times in a row (last five it was down). Sabadell is one of the worst four performers in the last three months (-17.8% vs -9.0% SX7P). The options market is pricing in a 5.2% move on the day.
Bankia – The most shorted Spanish bank and one of the most shorted ones in Europe. Despite the recent underperformance (YTD BKIA -20.3% vs -12.6% SX7P) the stock is still expensive trading at 11.8x PE 2019E under MSr estimates. The stock has a short interest level above the 13% of FF level, it is at YTD highs. The short interest has been elevated since late March. Bankia has been down five out of the last eight quarters. The stock was down the last two quarters on numbers but it has never been down three quarters in a row. The options market is not liquid enough to offer a proxy of the move on the day.
Unicaja – Well owned, well liked but not very liquid. The stock was up 4% last quarter after starting down, this quarter might be different. The positive sentiment towards rate sensitive names has put a lot of pressure on names like Commerzbank when Unicaja hasn’t been that severely. The stock was outperforming the SX7P by 37% by mid-June and now is only doing it by 21% after a significant underperformance. The options market is not liquid enough to offer a proxy of the move on the day.
What to buy Buy/Sell?
The question is whether the recent negativity has gone too far or not. In this sense, economists at Morgan Stanley comment to investors as follows:
“Santander cannot miss after the disaster last quarter; BBVA will have only capital to offer, Sabadell is bringing all the negatives ahead and will should on the positive side and then Caixa is the wild card: we want to own it but it is well owned already. In the case of Bankia and Bankinter we would play against positioning, a small good print in Bankia would squeeze the most shorted Spanish bank, at the same time Bankinter has a very high bar and it is priced to perfection.”
