| LONDON/MADRID, July 29
LONDON/MADRID, July 29 The dramatic earnings
turnaround boasted by four Spanish banks obscures the uphill
battle they still face to contain bad debts, grow their
businesses and increase shareholder value against the backdrop
of one of Europe's most challenging economies.
Bailed-out Bankia last week announced it had swung
to a 200 million euros profit in the first half of 2013 against
a 4.5 billion euros loss a year earlier.
Bankinter increased earnings more than four-fold, La
Caixa more than doubled its profits and Sabadell's
were up 37 percent.
Banco Popular was the only one of last week's
Spanish bank reporting quintet to report a fall in earnings,
down 3 percent.
Sharply lower provisions for soured property loans were the
rising tide that lifted almost all boats, and are expected to do
the same for Spain's flagship international banks Santander
and BBVA, whose results are due out this week.
Impairments for those property loans peaked in 2012, as the
Spanish authorities passed laws forcing banks to make greater
provisions. Popular's impairments continued to rise in the first
half of 2013 as small companies struggled with debts and more
real estate companies fell into arrears.
The path beaten by banks in other challenged European
economies shows that a peak in loan impairments and a subsequent
sharp bounce in earnings rarely mark the beginning of a smooth
road to recovery.
Bank of Ireland took its heaviest loan losses in the
half year to December 2009, but earnings' recovery from that
point was patchy and the bank's share price continued to fall
fairly consistently until July 2011 - almost two years after the
peak in impairments was hit.
A problem for the Irish bank was that provisions failed to
fall consistently after their initial peak, and periodically
spiked, making it harder for executives to speak of a consistent
recovery. It was a similar story at National Bank of Greece
, where impairments peaked in the quarter to December
2011, before spiking again in the quarter to June 2012.
Over in Portugal, the country's largest quoted lender
Millenium BCP, which reports results on July 29, gave
investors a false dawn, hitting its first peak in provisions in
the last quarter of 2011, before spiking to a new high n the
second quarter of 2012.
All three banks failed to enjoy a consistent share price
recovery after their impairments peak, not just because
investors weren't convinced the worst really was over for loan
losses. The underlying economic situation in all three countries
put the banks' net interest income - their core measure of
underlying profitability - under severe pressure and recovery
there was far from uniform.
Last week's Spanish results bonanza showed provisions at
Sabadell fell 43 percent in the first half of 2013, Bankinter's
fell 44 percent and Bankia's were down 89 percent.
"It's been a good year for provisions," Sabadell boss Jaime
Guardiola told a conference call.
Burned by their experiences with other struggling eurozone
countries, investors will be tough to persuade that the worst is
over. Several of the Spanish banks last week reported that while
the number of non performing loans on their books continued to
swell, the rate of new entries to the non-performing category
was slowing, a positive sign, they said.
"I haven't really got the sense that there is much to
suggest a real slowdown in the rate of deterioration (of
loans)," said Darragh Quinn, a Madrid-based banks' analyst at
"Corporate bankruptcies this year will likely be
significantly higher...Unless you're positive on Spanish GDP,
any Spanish bank is a risk as provisioning will remain high."
The threat from an asset quality review by the European
Central Bank also looms large, an added unknown that could force
extra provisions on Spain's larger banks whether they believe
they need them or not.
As well as threatening to trigger a fresh wave of
provisions, the sluggish economy, where unemployment has nudged
downwards but is problematically high at 26.3 percent
(ID:nL6N0FV1QG), also severely constrains the banks' earnings.
The first-half profits revealed by Spain's banks between
July 22 and 26 were impressive only in the context of the
horrific prior year comparison. The average return on equity
(RoE) across Bankinter, Sabadell, Popular and Caixa came in at
about 3.25 percent for the half year; Credit Suisse, which also
reported results on July 25, boasts an RoE of 12 percent. Bankia
did not provide RoE figures as its equity base was overhauled
with its bailout and the figures would not be meaningful.
Regaining internationally-respectable profits will be nigh
impossible for the Spanish banks if they cannot rebuild their
lending books by advancing new loans to credit-worthy borrowers,
a tall order in an economy like Spain's.
"Right now, in almost all aspects of the P&L in our national
domestic activity we are subject to a great deal of pressure,"
Sabadell's Guardiola told investors. "The economic situation in
the crisis has made it very difficult for us to have good
performance in margins."
"It's been more difficult to grow credit than we expected,"
Bankinter CFO Gloria Ortiz acknowledged to analysts on a
conference call, sentiments echoed by Bankia's second most
senior official Jose Sevilla at a news conference.
Despite the bleak conditions, the Spanish bank bosses
sounded a note of confidence, with Caixa chief financial officer
Gonzalo Gortazar stating that net interest income was
stabilising and would begin recovering next year.
Sabadell's Guardiola was more colourful, telling investors
the bank had "hit rock bottom already" and Sabadell believed its
results would "explode" over the coming months.