Investors pile into Spanish recovery
Capital is flowing into Spain in expectation of the economy’s return to growth but optimism might be excessive.
Even before the Bank of Spain reported on Wednesday that initial third-quarter GDP data suggest the economy might have ceased to shrink and even have posted a slight increase after two years of continuous declines, investors were already piling into the recovery play.
On October 10, equity strategists at UBS reported that the biggest equity flows in Europe during the previous four weeks had been out of safe havens such as Switzerland and into the periphery, notably Spain.
Additionally, data from the US Treasury show US investors moving back into Europe at the fastest rate since the start of the financial crisis.
The Bank of Spain points to a general eurozone pick-up and a strong summer tourist season as supporters of its nascent recovery, but the main driver has been such a strong revival of exports that the country is even running a current-account surplus.
If they had avoided Spain, international institutional investors were especially underweight its banks until the recent bout of enthusiasm. Now investors are back with a bang.
Analysts at Citi point out that since June 18, when this rally started, shares of Spanish banks are up between 34% and 63%.
While third-quarter results are now showing the first signs of improvement in net interest margin – after several quarters in which Spanish banks over-paid for deposits, struggled to reprice existing assets and couldn’t find anyone new to lend to other than the Spanish government – this stellar performance seems to be driven almost exclusively by multiples rerating rather than consensus estimate upgrades.
Are investors getting ahead of themselves? Unemployment in Spain remains at around 26%. The ECB has only just kicked off its asset-quality review (AQR), before becoming lead regulator of Europe’s largest banks late next year. Who knows what this might yet unearth.
Alberto Gallo, analyst at RBS, describes this as a moment of truth for Europe’s banks. “The AQR and stress tests will likely [also] unveil where some of the problems lie: among the mid-tier banks in Italy and Spain,” he says.
“These banks’ junior bondholders could face burden-sharing to replenish capital, and in the meantime periphery firms will continue to struggle to get credit.”
Banks analysts at Citi, in a note put out on Wednesday entitled Spanish Banks: Mucho Optimismo, argue that “the market is pricing in a very healthy dose of optimism on: carry trade profits; very low credit loan loss provisions and/or write-backs; and low cost of equity”.
The big carry trade, of course, has been in Spanish government debt.
|Alberto Coll, deputy chief financial officer at Banco Sabadell|
There are signs of the worst having passed for Spanish banks’ real-estate problems. Alberto Coll, deputy chief financial officer at Banco Sabadell, talking to Euromoney on its equity capital raising (see feature in November magazine), says: “We have disposed of over 12,600 properties year-to-date at discounts ranging between 50% and 65%. “We are seeing British, German, French, Swedish and Russian buyers coming back into the market for such properties.”
At the end of August, Sabadell sold bonds from an ABS vehicle backed by 953 properties to a consortium of international institutional investors, including leading dedicated real-estate funds. Coll says: “The appearance of these specialist real-estate investors is a very positive signal to the market that the bottom has been reached.”
And there could be more good news in the offing if European policymakers allow Spanish banks to count all of their deferred tax assets as capital, which would enhance their regulatory ratios and make them better able to withstand future stresses.
However, even Coll was taken aback at the strength of international investor interest during roadshows for its equity offering.
“We were overwhelmed by how positive investors felt because while we do think Spain will recover, we think this recovery will be slow,” he says. “When we asked investors why they were so positive, they told us that they felt they simply couldn’t afford to miss out.”