Spanish Bank ADRs May be Avoided Now

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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.

A look at S&P Europe 350 Dividend Aristocrats

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The S&P; Europe 350 Dividend Aristocrats Index (in Euros) is up 17.88% so far this year. Compared to this, the US S&P; 500 Dividend Aristocrats is up just 4.19%. The S&P; High Yield Dividend Aristocrats is actually down 1.27%.

European dividend stocks usually have higher yields than US. In Europe, most companies prefer to payout their earnings than to plough it back into the company coffers for growth. In addition, most of these companies are conservatively run and have huge investor base who depend on dividends for their additional income. Smart US investors have traditionally invested in stocks on the other side of the pond for better dividends.

As the above update on the S&P; Europe 350 Dividend Aristocrats Index shows, when markets stabilize dividend stocks rise nicely when compared to non-dividend paying stocks. In this case, the index has 40 components including world-class companies like Nestle, Barclays, Novo Nordisk etc. These companies pay consistent, high dividends – maybe not the financials. The S&P; 500 Dividend Aristocrats has performed worse than the European peer index with a growth of less than 5%. This is because despite being the US Dividend Aristocrats, most US companies have a lower dividend yield.

The following are the 40 components of the the S&P; Europe 350 Dividend Aristocrats Index:
Abertis Infraestructuras, S.A.
Atlas Copco AB – A Shares
Barclays
British American Tobacco
British Land Company plc
Capita Group
Centrica
Cobham
CRH PLC
Daily Mail & General Trust ‘A’
Enterprise Inns PLC
Essilor International SA
FirstGroup
Gas Natural SDG, S.A.
Hammerson
Hermes International
Iberdrola S.A.
KBC Group NV
Legal & General Group
Man Group PLC
Misys
National Grid PLC
Nestle SA
Next plc
Novartis AG
Novo Nordisk A/S – B Shares
Orkla ASA
Pearson
Publicis Groupe
Rexam PLC
Roche Holding AG
Royal Dutch Shell – B shares
Sanofi–Aventis
Scottish & Southern Energy
Svenska Handelsbanken AB – A Shares
Tesco
UCB SA
Union Fenosa, S.A.
Vodafone Group PLC
WPP Plc

For US investors, only a few of the above stocks are available as ADRs. And some of them trade on the thinly traded OTC markets. Some of the above stocks that are avaialble in the US are listed below together with their ticker and current yield:

Nestle SA Spons Reg (NSRGY)
Current Yield: 3.28%

British Land Company plc(BTCLY)
Current Yield: 9.10%

Iberdrola S.A. (IBDRY)
Current Yield: 5.46%

National Grid PLC(NGG)
Current Yield: 7.17%

Novartis AG(NVS)
Current Yield: 4.28%

Barclays has suspended dividend payments since it received heavy infusions from the British government last year. Also today there is news that a large Gulf investor plans to offload shares in Barclays. Other great companies in the list are Sanofi–Aventis, Tesco(TSCDY) – the top British supermaket chain, Vodafon, etc. While the European dividend players offer high yields, it is important to select high quality companies as recently som banks have disapeared altogether or slashed dividends drastically.

The Top 10 Best Performing European ADRs Year-to-date

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The following is a list of the top 10 best year-to-date (YTD) performing European ADRs listed in the organized exchanges:

Mechel Steel MTL – 175.25%
Wimm-Bill-Dann Foods WBD – 104%
Vimpel Communications VIP – 82%
Acergy ACGY – 79%
Aixtron AIXG – 74%
ASM International – New York Shares ASMI – 62%
Flamel Technologies FLML – 61%
Credit Suisse CS – 59%
Randgold Resources GOLD – 59%
Oce OCENY – 56%

The % denoted is the growth so far this year.Vimpel is a fast growing mobile and telecom service provider in Russia. After falling heavily the stock has rebounded nicely. Due to the rebound in commodity prices, stocks such as GOLD and MTL have had a great run from their March lows. It is interesting to note that only only stock in the financial sector (CS) is in the list. However National Bank of Greece has grown about 50% YTD. Overall it is a mixed bag with many large cap banks like Barclays, Deutsche Bank still underperferming other ADRs.

Emerging Markets Equity Performance Review

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Emerging markets have easily outperformed the developed world markets since stocks rebounded from March this year. Emerging countries such as Brazil, India, China, etc. continue to attract capital and show strength relative to developed markets. Massachusetts-based EPFR Global which tracks fund movement worldwide, said that another $3.5 billion went into emerging market equity funds for the week ending May 13. Since the March lows, EPFR says $18.6 billion have moved to emerging markets.

The following are some key points on Emerging Markets from an IMF working paper titled “Spillovers to Emerging Equity Markets: An Econometric Assessment” by L. Effie Psalida and Tao Sun:

1.Emerging market equities have outperformed since 2003  and have recovered nicely in the past 3 months. In the chart below, we can see that US, Germany, UK and Japan equity indices lagged in performance when compared to emerging markets. Latin America is ahead of Asia and other emerging countries.Emerging Markets

2. The stock market capitalization to GDP ratio of many emerging markets is now nearing those of advanced economies.

Emerging Market Caps

The above shows the countries like Jordan, Chile have rebounded most from the trough to their peak attained in October 2007.  Russia is lagging behind Brazil, China and India since Russia is more heavily dependent on commodities such as crude oil.

3.Equity market returns of emerging countries have risen at a much higher rate than their developed market peers while the P/E ratios are comparable.

Emerging Market PEs

Source: Spillovers to Emerging Equity Markets: An Econometric Assessment, IMF Working Paper, L. Effie Psalida and Tao Sun

The Brazilian market has returned an astonishing 1199% return between January 2003 and July 2008. In the same time period, the US market has grown the lowest in the above chart. US markets performed worse than those of Germany and the UK.

The P/E ratio of China is the highest as of May 1, 2009 at  about 27.0Russia has the lowest at about 5.0.The P/E ratios if US, India, Chile, Brazil, etc. are very close to each other.

It remains to be seen if emerging markets will continue the momentum and outperform the developed equities this year. Many of the markets such as India, China have already bounced back to reach very high levels though the underlying economy is not growing at the same rate before the credit crunch began.

Related ETFs include:

iShares MSCI Emerging Markets Index (EEM)
iShares FTSE/Xinhua China 25 Index (FXI)
iShares MSCI Brazil Index (EWZ)

Knowledge is Power: UK Housing Picking Up? Edition

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1.Korea’s Ministry of Strategy and Finance reveals details of its $19.6 billion plan for the economy’s new growth engines. Korea announces boost to services sector

2. The FDIC’s Deposit Insurance Fund has plunged to an all time low of just $13 billion as of March 31, or 0.27% of $4.8 trillion in insured deposits. It is worth nothing that since March 31, 15 new banks have failed which includes the biggest one so far this year, BankUnited (which Marla has a special fondness for in her heart and will be providing some ongoing entertainment on).FDIC’s Deposit Insurance Fund Reserve Ratio Plunges To 0.27% Of Deposits

3.May 29 (Bloomberg) — Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a lifelong Republican, boarded Air Force One for the first time in February. Neither President George H.W. Bush nor his son, President George W. Bush, had invited her on the world’s most famous jet in the five years she worked for them. Bair Becomes Bane of Too-Big-to-Fail Banks as Enforcer Geithner Must Trust

4.Britain’s finances are indeed a mess, but the economy is no worse than the rest of Europe and the United States — and housing is even picking up speed.Why Britain May Fare Better Than Expected

5.LONDON–The British government says more than 35,000 new cars have been ordered through its new car scrappage program since it was launched a month ago.

The government and car industry are sharing costs to offer discounts of 2,000 pounds ($3,550) to new-car buyers who trade in a model more than 10 years old.35,000 take advantage of U.K. scrappage program