Analysts are somewhat surprised by the current price of Spanish entities. They find hard to believe they are in better shape than French or German banks (Italians are going thought a more difficult period) and think the recent bullish rally is due more to the optimism reigning on the Spanish market than to fundamentals.
There is no doubt that Spanish banks are now collecting some of the fruits of the sector reform launched in 2009 and its subsequent recapitalizations, as all international agencies reckon. But it is also true that without a solid economic recovery and an unemployment rate higher than 25% it is very difficult to make banking retail.
A recent report by financial analyst association Afi on the transformation of the Spanish financial sector expects that delinquency will continue to rise until mid-2014 and there will not be a gradual recovery of the credit until the end of 2015.
The scene may be complicated further if finally Draghi does not launch a new LTRO next year, the auction program allows borrowing from the ECB at a 1% rate.
Spanish banks requested more loans than anybody in the two previous auctions and have also more money to return: 185bn euro, which will expire at the end of next year. A new LTRO would allow them to meet these maturities more easily and take advantage of the immense business of the carry trade, which involves borrowing at 1% to then buy public debt for which they get a return of more than 4%.
The European authorities are suspicious and all signs are that the ‘carry trade’ can be penalized in the forthcoming stress tests. Some Spanish banks would not look so good in the picture, although it is important to point out the largest ones (Santander and BBVA) have already returned almost everything they borrowed from the ECB.