Table of Contents
Executive summary..................................................................3
Recovery still a long way off but coffers look sufficient to
avoid losses; upgrading POP, SAB, BTO to Neutral .............5
Spanish domestic banks have not participated in the sectors’ recent rally...................5
Fundamentals remain negative, though no banks posting absolute losses after
meaningful provisioning-led upgrades.........................................................................6
Valuation: full ROE normalization still distant; 2012E is first year where provisions
decline, but some visibility gained – upgrading Popular, Banesto and Sabadell to
Neutral .......................................................................................................................11
Investment case summary and recommendation changes 16
Earnings outlook ....................................................................19
Underlying trends not improving; reported profits should remain resilient — 2012E
is the first year in which provisions are expected to decline......................................19
1. Pre-provision profitability — headwinds accelerating into
2010E.......................................................................................21
1.1. Unsustainable net interest income strength, 8% declines expected for 2010......22
1.2. No strong support from non-interest income, though recent declines are unlikely
to be repeated .............................................................................................................35
1.3. Usual efficiency benefits, but limited scope for costs to support declining
revenues in 10E..........................................................................................................36
2. Asset quality – losses yet to be booked, NPLs show
signs of moderation and new regulation is also helpful.....39
NPL formation occurring at a decelerating pace, risks of a second leg of deterioration
in 10E.........................................................................................................................39
Spanish regulation remains more conservative than other European countries, even
after recent relaxation - Recent NPL formation yet to be translated into higher
provisions...................................................................................................................44
Updated provisioning forecasts - Banks impair c.5% of their loans in 3 years, or
c.3.0-3.5% net of provisioning releases .....................................................................46
Real estate provisions expected to decrease over time ..............................................56
Company Profiles...................................................................57
Banco Popular ........................................................................58
Banesto ...................................................................................60
Banco Sabadell.......................................................................62
Bankinter.................................................................................64
Banco Pastor ..........................................................................66