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Based on our sensitivity analysis,
Spanish banks are discounting a much
more severe economic slowdown than
we expect. We remain more positive
than consensus
Cutting our 2008 EPS estimates, by 8%
for BBVA and SAB, and by 6% for SAN.
We are 5% below consensus for BBVA
and SAB, but in line for POP and SAN
We lower our target prices by an
average of 9%. BBVA and SAN, both
OW, are our preferred stocks, and still
offer potential total returns of c40%
Discounting a severe economic slowdown
Our sensitivity analysis suggests that under a much more
severe economic slowdown than we expect, BBVA and
SAN would trade at an implied PE of 9x, versus 10x for
POP and 12.7x for SAB. We view this as excessive, given
our expectation that ROE will range between 14% and 20%
in 2008 and 2009.
Recession is not priced in
We believe a recession is not fully priced in and investors
who are expecting one should continue to avoid the sector. A
return to 1993 revenue decline and bad debt provisioning
levels would cause PEs to jump to 14-24x, but ROE to be in
line with or just above cost of equity, which should support
PBV valuations.
Concerns about rising provisions and
declining coverage are unfounded
Historical evidence suggests that provisions rise in a
recession despite the use of generic provisions models. But
Spanish banks still have sounder balance sheets than
European peers. We believe they would take 2-7.7 years to
work out excess reserves, assuming that NPLs rose 40% pa.
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