Tuesday, 26 January 2010 23:00

The Spanish Inquisition is About to Begin...

Now, it is time to see if fundamentals return to the market.

From Bloomberg: BBVA Fourth-Quarter Profit Plunges 94% to $44 Million on Asset Writedowns

Jan. 27 (Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA said fourth-quarter profit slumped to 31 million euros from 519 million euros a year earlier as the lender wrote down the value of some assets.

BBVA fell the most in eight months in Madrid trading after
saying net
income
fell to 31 million euros ($43.6 million) from
519 million euros a year earlier, the Bilbao, Spain-based bank
said in a filing today. That missed the 1.05 billion-euro median
estimate in a Bloomberg survey of nine analysts as the bank took
a 704 million-euro writedown for its U.S. franchise.

BBVA said it took the
writedowns after analyzing its “most problematic portfolios”
as it prepares for a tough year with recessions in its biggest
markets of Spain and Mexico.

“Whenever there are writedowns like this, there must be a
clear negative message behind that,” said Peter Braendle,
who
oversees about $57 billion at Swisscanto Asset Management in
Zurich and holds BBVA shares. “My concern is that the worst may
not be over, especially in Spain.”

Extra Provisions

The bank took 1.05 billion in charges as it adjusted the
value of its U.S. business. Other writedowns included 200
million euros of provisioning charges for assets acquired in
Spain as it reported additional losses on its Iberian consumer
loan book, BBVA said.

Today’s writedown represents about 15 percent of the
goodwill attached to the U.S. business, according to estimates
by Banco BPI SA. U.S. provisions were 715 million euros higher
than in the third quarter as the bank adjusted the value of
commercial real estate collateral. The bank also took a charge
of 73 million euros on its Mexican cards business and a 90
million-euro charge to account for Venezuelan inflation.

Bad loans as a proportion of total lending climbed to 4.3
percent from 2.3 percent a year ago. “Doubtful risks” on
BBVA’s books leapt to 15.6 billion euros from 12.5 billion euros
in September and 8.6 billion euros a year ago.

Loan Losses

“I don’t think the U.S. goodwill writedown is as important
as all the new non-performing loans,” said Simon Maughan,
an
analyst at MF Global Securities Ltd. in London. “It’s catch-up
time for loan losses. For those people who may have had their
doubts about the Spanish methodology for timely reporting of
NPLs, here is some strong evidence to support their view.” Let it be known that I issued this warning one year ago! [Reggie]

Profit from Spain and Portugal fell 24 percent to 496
million euros from a year ago, the bank said. Bad loans as a
proportion of total lending almost doubled to 5.1 percent from
2.6 percent as lending shrank 1.2 percent.

Earnings from Mexico dropped 29 percent to 268 million
euros, the bank said. BBVA booked a loss of 122 million euros
from its U.S. business compared with a 21 million-euro gain a
year ago.

Net interest income climbed to 3.59 billion euros from 3.09
billion euros a year ago.

The bank had a core capital ratio of 8 percent compared
with 6.2 percent a year ago. BBVA said it would keep its
commitment to distribute 30 percent of 2009 profit in dividend
payments.

This was foreseen nearly one year ago, to date. This bank got caught up in the bear rally and apparently (like many banks) was not deserving of the outrageous boost in the share price. Reference the past analysis.

Declining housing and stock prices, and rising unemployment levels are squeezing consumer wealth globally and are expected to weigh heavily on the banking system in the form of rising loan defaults. Until very recently, the global banks have experienced most of the impact in the form of distressed securities, capital shortages and funding problems, however the problems have now started to engulf their consumer and commercial loan portfolios as well.

In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and consumer loan portfolio. The Spanish real estate sector is making a high horsepower a U-turn after years of a massive housing bubble that has burst - culminating in an unemployment rate that has risen to an outrageous 13.4% level. The power skid is showing no signs of reaching an inflection point, and we believe is only in the beginning throes of a sharp downturn. In addition, the banks' other key growth areas including Mexico, the U.S and South America are witnessing a slowdown in economic activity, restricting BBVA's growth prospectus amid the current turbulent environment. With increasingly challenging economic conditions in each of these economies, BBVA's asset quality has deteriorated sharply with non-performing loans rising to 36% of its tangible equity without corresponding (equal) increase in provisions. As the bank deals with these tough times ahead, we expect BBVA's bottom line growth to remain subdued due to a slower credit off-take and higher provisions in the coming quarters.

Key Highlights

Sharp slowdown seen in Europe - According to the European Commission forecasts, the European economy is expected to contract 1.9% in 2009 with a modest recovery in 2010. Spain, in particular, is expected to be one of the worst hit due to the humbling of its housing sector which had, for several years, been a significant contributor to the country's economic growth. This will impact BBVA by slowing down its credit and loan growth in addition to significantly deteriorating the credit quality of its loan portfolio.

BBVA's asset quality is set to deteriorate rapidly as Spain enters recession - Problems in Spain are more pronounced than in most of its European counterparts. The Spain's budgetary deficit has already crossed the 3% threshold limit set by the European Commission and is expected to cross 6% by 2009, only behind Ireland. The unemployment has reached a 12-year high of 13.4% in November 2008, the highest in the Euro zone, while the real estate sector bubble (particularly residential vacation homes purchased by foreigners), the pillar of economic growth engine, has burst. BBVA, with nearly 40% of its total loan exposure tied to real estate & construction loans and individual loans in Spain could see massive deterioration in its asset quality.

Besides Spain the bank has to deal with other challenging economies including Mexico and the U.S - In 3Q2008, U.S and Mexico contributed nearly 29% and 16% of total revenues, respectively. The downturn in the U.S economy is showing no signs of stabilization, with an unabated fall in housing prices and frozen credit markets continuing to shatter consumer confidence. Recession in the U.S has also led to a sharp slowdown in Mexico which is highly dependent on US for exports and remittances. The slowdown in both of BBVA's key markets will not only impact the pace of BBVA's growth but also augment the risk profile for the bank as it now has to deal with vagaries of these economies to navigate itself in these turbulent times.

BBVA's NPAs have skyrocketed on back of economic slump - Since January 2008, BBVA's non-performing loans have increased 92% to €6.5 bn. As at the end of 3Q2008, BBVA's loan losses as a percentage of tangible equity stood at an astonishing 36%. Eyles test, a measure of banks' delinquent loans (net of reserves) as percentage of its tangible equity, has increased to 12% in 3Q2008 from 4% in 2Q2008. This sharp rise in the bank's NPA levels, particularly in context of its lower equity cushion, could substantially erode shareholders' equity.

Inadequate provisioning to impact BBVA's bottom line - Owing to deteriorating loan portfolio, BBVA's NPAs have almost doubled to 2.0% of the total loans in 3Q2008 from 1.1% in 3Q2007. Despite an increase in NPAs, the bank's provision has declined to 2.3% of the total loans from 2.4% a year ago. As loan losses are expected to increase in the wake of economic slowdown, BBVA will have to increase its provisions considerably, denting its near-to-medium term net income.

BBVA's valuation at... Register (for free) and download the full report Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-01-28 16:04:04 439.80 Kb

For those who haven't been to the Spanish coastal areas to see for themselves or are not familiar with the Spanish situation, I have included random research on Spain from pundits around the Globe!

  1. Spain Facing 'Exceptional' HardshipEU Observer
  2. Spain: Overall analysis ( 369,54 KB ) la Caixa
  3. The economy in 2009: out of The Twilight Zone ( 160,73 KB )
  4. Spain: Dies Irae; Beyond the real estate crisis Société Générale Economic Research
  5. The IMF on Spain
  6. An adjustment in Spanish saving has begun - JP Morgan
  7. Economic Survey of Spain 2008 - OECD
  8. Spain: The Worst Is Yet to Come - Morgan Stanley Global Economic Forum
  9. Spain: First GDP contraction in 15 years (-0.2% q/q in Q3 2008) - BNP Paribas
  10. Quarterly Report On The Spanish Economy: Spain's GDP Contracted 0.2% in Q3 Compared to Q2 - The Bank of Spain
  11. Inflation Is Dead In Spain, Fasten Up Your Seat Belts For A Sharp Dose Of Deflation - A Fistful of Euros
  12. Spain: External imbalances persist, fiscal surplus disappears - European Commission Autumn 2008 Forecast
  13. Macro: Construction Correction Driving Economy Down - Morgan Stanley - Global Economic Forum

 

Additional Blog References to BBVA

The Spanish Bank Steps in Lockstep

(Reggie Middleton's Boom Bust Blog/MyBlog)
BBVA Profit Slumps according to Bloomberg, as I explained to readers a few months ago - Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank From Bloomberg: Banco
Tuesday, 28 April 2009

 

Banking update, back to the future or fast forward to the past?
(Reggie Middleton's Boom Bust Blog/MyBlog)
...ite-downs 2008-09-25 00:50:05 841.57 Kb Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-02-23 09:05:09 439.80 Kb Banco Bilbao Vi...
Tuesday, 31 March 2009

 

...w caught by surprise by this. See the macro trade addendum of Banco Bilbao Vizcaya Argentaria SA (BBVA) Addendum - Pro 2009-01-28 17:48:27 569.55 Kb or the same addendum of the UK insurer on how...
Tuesday, 10 February 2009

 

5. The Spanish Banks Start to Unload
(Reggie Middleton's Boom Bust Blog/MyBlog)
...may update this if the opportunity presents itself. In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and...
Wednesday, 30 December 2009
Last modified on Friday, 18 May 2012 10:16

6 comments

  • Comment Link Reggie Middleton Thursday, 04 February 2010 11:10 posted by Reggie Middleton

    High five, my friend. I caught it as well. Next week will see more european research for my subscribers, including central and eastern europe. Also notice how well the Chinese positions released 2 weeks ago are doing. i will have some specific companies with and without ADRs soon, as well as a Bank highly levered to the European mess that is not in the media yet.

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  • Comment Link Ken09 Thursday, 04 February 2010 10:43 posted by Ken09

    went heavily short on BBVA and STD after viewing Roubini's Davos interview:)

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  • Comment Link ... Thursday, 28 January 2010 07:42 posted by ...

    "The unemployment has reached a 12-year high of 13.4% in November 2008" or you mean Nov 2009 ?

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  • Comment Link Reggie Middleton Wednesday, 27 January 2010 10:44 posted by Reggie Middleton

    I have a lot of research coming up and central and eastern European countries. It should be out this week.

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  • Comment Link shaunsnoll Wednesday, 27 January 2010 10:37 posted by shaunsnoll

    some of the eastern european countries look like nightmares too. nice call Reggie, good to see some reality in the markets again finally. God help us if the gov tries to pull out stimulus, will be good for shorting at least!

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  • Comment Link Reggie Middleton Wednesday, 27 January 2010 04:41 posted by Reggie Middleton

    This has been something that I have been discussing internally with my team for over a year now:
    [quote]Jan. 27 [url=http://www.bloomberg.com/apps/news?pid=20601087&sid=aVW11LBGT.08&pos=6](Bloomberg[/url]) -- New York University Professor Nouriel Roubini said he’s never been more pessimistic about the future of European monetary union, saying Spain poses a looming threat to the euro region holding together.

    “Down the line, not this year or two years from now, we could have a breakup of the monetary union,” Roubini said in a Bloomberg Radio interview from the World Economic Forum’s annual meeting in Davos, Switzerland. “It’s a rising risk.”

    Roubini’s concern contrasts with the view of European Central Bank President Jean-Claude Trichet who said it’s “absurd” to imagine that the 16-nation euro area could splinter. Speculation of a breakup has mounted in financial markets as Greece struggles to cut the continent’s biggest budget deficit and countries from Spain to Ireland face rising debt burdens.

    “The euro zone could drift essentially with a bifurcation, with a strong center and a weaker periphery and eventually some countries might exit the monetary union,” said Roubini, who predicted the recent financial crisis a year before it began. “This is the very first test” of the single currency bloc.

    Economies including Spain and Greece are threatened by fiscal imbalances and declining competitiveness, Roubini said. Membership in the euro means they can no longer devalue the currency to export their way out of recession, he said. [/quote]

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