3 Financials Worth Buying…in Spain

06/28/2012 9:45 am EST


Rudy Martin

Editor, Investing Insight

While many investors are still waiting around to see how major US financials work through their over-indulgence years ago, the top Spanish banks are already looking good, and with tantalizing yields to boot, writes Rudy Martin in Latin Stock Investing.

Some of the biggest US banks joined a growing population of European financial institutions last week in suffering multi-tiered downgrades to their credit ratings.

But some interesting opportunities likely exist in the ashes. Look at big investment moves and you will notice that some of the biggest gains resulted from rebounds by stocks that had been driven unreasonably low by panicked investors.

The major focus of financial sector was on Spanish banks. To put it bluntly, most of them are a mess. But thrown out by investors with the dirty bath water are a couple of large, diversified, internationally focused Spanish banks whose stock prices have been driven unrealistically low.

So given some time, some major recoveries can be expected when the anxiety level of the market cools and the full potential of these banking firms is fully recognized. This prompted a recent Latin Stock Investing Trading Alert:

  • Add to Banco Santander (SAN) at market.
  • Add to Banco Bilbao Vizcaya Argentaria (BBVA) at market.
  • Add to AFP Provida (PVD) at market.

Along similar lines, confidence that metals would rebound from depressed levels prompted the following: Buy Southern Copper (SCCO).

Late last week, a Spanish government stress test of that nation’s banks determined that as much as €62 billion ($79 billion) in new capital will be required to absorb losses in the coming years. The tests, administered by two independent consulting firms, was performed to serve as the basis for Spain’s government request for European Union aid to help finance a cleanup of that nation’s banking sector.

But while the study determined that some big banking firms needed major injections of capital, Banco Santander and Banco Bilbao Vizcaya Argentaria likely wouldn’t need to raise new funds. Both have strong franchises along with significant emerging market and non-European operations.

Like Moody’s, which has been downgrading US and European banks of all sizes right and left, Fitch Ratings has been lowing the grades it assigns to sovereign debt of European nations as well as the resident banks of all sizes.

But Fitch left the slightly diminished ratings of Santander and BBVA a notch higher than that of Spain’s sovereign debt. The less severe treatment afforded the two banks reflected “geographical diversification, strong financial performance and a proven capacity to absorb credit shocks,” according to Fitch.

“Santander and BBVA benefit from their international diversification in retail banking, which gives them the capacity to generate earnings internationally, making up for muted results in Spain and supporting good recurring performance,” Fitch reported. "Growth prospects for emerging markets in which Santander and BBVA subsidiaries operate have been revised down, and they are not entirely immune to global economic trends, but earnings from these markets will continue to contribute significantly to group earnings at both institutions.”

Fitch also noted that if things really get bad for Santander and BBVA, their diverse operations in the Americas and elsewhere provides “the ability, subject to market conditions and appetite, to sell stakes if needed.”

So while the shares of the two giant Spanish banking firms have been knocked down along with their less secure competitors, there are solid reasons to believe that once their underlying strengths become recognized by investors, their shares should enjoy strong rebounds.

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