BBVA Reignites European Write-Down Fears

BBVA is Spain’s second biggest bank with activities also in the US, Latin America, Asia and China (15% stake in China Citic Bank).

Policy makers have long feared that European banks are failing to face up to their losses. BBVA‘s fourth-quarter results will hardly dispel those concerns. The Spanish banking group reported Wednesday that net income for the three months to December fell to just €31 million ($43.7 million), after taking an unexpected €1.4 billion of new provisions. This follows Societe Generale‘s surprise warning earlier this month that it faced €1.4 billion of fresh write-downs on its structured credit portfolios. As European banks kick off their 2009 reporting season, investors should brace themselves for further surprises. (…)

BBVA’s total nonperforming asset ratio may now be an eye-watering 4.3% — and 5.1% on its Spanish portfolios — but expected losses are now 57% covered by provisions. Meanwhile, BBVA’s capital position looks strong with a core Tier 1 capital ratio of 8%. The bank’s profitable emerging market operations, notably Mexico, provide strong capital generation. And BBVA’s focus on retail banking rather than risky trading activities makes it less vulnerable to new regulatory capital charges.

The higher provisions in the US were tied to commercial real estate loans.

That leaves BBVA still one of the most promising European banks, despite a 5% fall in the shares on the back of the results. A sustainable return on tangible equity of over 20% plus the potential to pay a generous dividend should support a share price in excess of the current twice tangible book value. But investors will now worry about other banks such as Barclays and Deutsche Bank whose balance sheet valuations have been regularly questioned. Policy makers did warn that investors were being too complacent.

Full WSJ article


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