Citi is Confident in the Spanish Bank

Citi is confident in The Spanish Bank

Citi is confident in The Spanish Bank

After a wave of restructuring and recapitalisation, Spanish banks are back on investors’ buy list, endorsed by top global investment banks like Citi. Their stock market performance so far this year reflects this renewed confidence, with some of the country’s mid-sized lenders notching up as much as 25 per cent share price appreciation.

Citi raised its recommendation on all the banks in Spain’s blue-chip IBEX-35 index with the exception of Bankinter, which it considers to be fairly valued. The financial sector’s successful consolidation efforts and its improved capitalisation levels, as well as the potential to boost market share, are all plus points for Citi. This positive reading came just three months after JP Morgan affirmed Spain is back on track, flagging that its banks have focused on deleveraging to cut debt and clean up their balance sheets.

But the road to recovery has not been an easy one for Spanish lenders, given the backdrop of a deep recession which the country only managed to exit in the third quarter of 2013. So is this renewed interest in the banks sustainable?

EU FUNDING, BAD BANK BOOSTS SPAIN LENDERS

Spain’s financial industry has struggled to recover from a 2008 housing crash that saddled its banks with huge unpaid property loans. Hefty provisioning on these bad loans left some lenders, particularly the regional savings banks, so short of capital the state had to bail them out. Towards the end of 2012, the government set up “bad bank” Sareb as part of an about 40-billion euro European bailout to bolster banks’ capital against a serious further economic downturn.

As a result of these measures, the banks’ solvency ratio went from 12 per cent in 2008 to 25 per cent in October 2013, according to Bank of Spain data. The sector has also benefitted from government-led consolidation, which has slashed the number of savings banks and promoted mergers to increase efficiency and cut costs. Further consolidation and cost optimisation will enhance Spanish banks’ profitability, Citi said ahead of first quarter 2014 results.

OPPORTUNITIES TO GAIN MARKET SHARE

There are still headwinds for Spanish banks as shrinkage in credit availability and high unemployment remain a drag, with companies and households finding it difficult to pay debts. But the potential to increase domestic market share will contribute to a continued recovery.

According to Citi, the retail banks have the opportunity to rob 8-10 percentage points share from the country’s savings banks, as well as take advantage of some foreign players’ departure. Earlier this month, Barclays said it will pull out of the private banking sector in many European countries including Spain. Bankinter is tipped to buy the UK lender’s client portfolio.

If you’re interested in investing in Spain, contact corporate law firm Argali Abogados.

Leave a Reply