A Winner from Spain's Banking Mess
02/15/2011 3:14 pm EST
The draconian reform of Spain’s undercapitalized caja banking sector is shaping up as a major opportunity for Spain’s big international banks, Banco Santander (NYSE: STD) and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA). The biggest opportunity lies with Banco Bilbao, I think, because it has neglected its home market for the last ten years and the troubles at the cajas give the bank a chance to rebuild a domestic market share that has fallen to 11% from 16% a decade ago.
I own Banco Santander in my Dividend Income portfolio, where it’s up 18.3% since I added it on May 28, 2010. (The trailing 12-month yield is 6.65%.)
Today, February 15, I’m adding Banco Bilao Vizcaya Argentaria to my Jubak’s Picks portfolio.
Spain’s cajas, the country’ unlisted savings banks, are being forced into reform by Spanish finance minister Elena Salgado, who has taken the job of fixing the sector away from the Bank of Spain. Salgado’s plan is to set capital requirements for the cajas high enough—a minimum of 10% for any caja that isn’t listed on a stock market (and that has less than a fifth of its equity held by private investors) and is thus unable to tap public equity markets—that cajas will be forced to combine, go public, or sell to larger banking groups. (For example, Caja Madrid, the fourth- largest financial group in Spain, is expected to go public this year.)
The cajas got into trouble by aggressively lending to property developers in Spain. That meant they gained a bigger share of the Spanish banking market, but it left them disastrously short of capital when the Spanish real estate market collapsed.
Banco Bilbao had spent the last decade expanding in the Americas and Asia with those two regions accounting for 58% of gross income in 2010 (up from 53% in 2009). Mexico by itself accounted for 27% of gross income, only slightly below the 33% accounted for by Spain and Portugal.
The company isn’t about to reverse that international expansion. At the end of 2010, for example, the bank bought a 25% stake in Turkish bank Turkiye Garanti Bankasi (OTC: TKGBY, or GARAN.TI in Istanbul) for $5.8 billion with the option of buying control in 2015.
But now Banco Bilbao sees a big growth opportunity at home. “We should probably grow our market share in this country by 50% in the next three years,” CEO Francisco Gonzalez told the Financial Times in early February.
Banco Bilbao announced full 2010 profit of $6.35 billion on February 2—that’s an increase of 9.4% year-to-year. At 10.7% in the fourth quarter of 2010, return on equity was down from the 16.7% of 2009, but still solid for a bank operating in a Spanish debt crisis that has pushed up the cost of capital (net interest margin fell to 2.21% in the quarter from 2.28% in the third quarter) and pushed down revenue. The core Tier 1 capital ratio was 9.6% at the end of the year, but will fall to 8.6% once the Garanti Bankasi stake is incorporated into the bank’s balance sheet in early 2011. (At 8.6%, the capital ratio is above the Bank of Spain’s 8% minimum for 2013.)
This isn’t to say that Banco Bilbao has completely escaped the Spanish debt crisis. Non-performing assets were stable at a high 5% in Spain, but provisions for loan loss reserves took a 35% bite out of net interest income.
I’d put a target price of $15 on the stock by December 2011. The shares also carry a trailing 12-month yield of 7.63%.
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Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. The fund did own shares of Banco Bilbao Vizcaya Argentaria and Banco Santander as of the end of December. (I will have the January portfolio holdings posted this week.) For a full list of the stocks in the fund as of the end of December, see the fund’s portfolio here.