Spanish Bank ADRs May be Avoided Now

Spanish banks Banco Bilbao Vizcaya Argentaria (NYSE:BBV) and Banco Santander SA (New) (NYSE:STD) may be avoided for investment now. While both are some of the largest banks in the world, their earnings have been impacted adversely not only due to the recession but also due to some wrong strategic moves. The collapsing real estate market in Spain does not help either.

Spanish banks had higher profitability than then their EU peers from 2003-07 as the chart shows below. The profits were higher despite having lower leverage ratios than other EU banks.

However in recent months, credit growth has come to a halt and is falling non-performing assets are rising. As a result banks in Spain have been writing off many bad assets.
The boom in Spanish housing market and the subsequent collapse has hurt banks very badly. As we can see from the following chart, the largest loans made by banks was to the home mortgage market at over 30%.When construction loans are added, this exceeds over 50% of all loans. Clearly this will have further negative implications for bank earnings are mortgage defaults sour due to the rising unemployment rate and lower wages.

Source: Selected Issues, IMF, April 2009

This week BBVA offered its employees five year leave with 1/3rd of pay to as part of cost-cutting measures.

Banco Bilbao Vizcaya Argentaria S.A. (BBV) currently pays a 7.08% dividend yield and Banco Santander SA (STD) pays 12.71%. Despite these high yields it may be a good idea to wait for the Spanish housing market to stabilize and the overall economy to improve before investing in these two bank ADRs.

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