From FT Alphaville

On Thursday Credit Suisse cut their 2010-2012 earnings estimates and price targets for all the Spanish banks they cover by an average 11 and 7 per cent, respectively. They currently have underperform ratings on purely domestic Spanish banks, a neutral on BBVA and an outperform on Santander.

The reason for the sweeping cuts?

Here’s what Credit Suisse’s Santiago López Díaz says:

Spain is likely to remain in recession over the next two yearsand we are concerned about the country’s lack of competitiveness and twin deficits. We believe unemployment (which may not recover to pre-crisis levels for another 5–10 years) continues to be the main problem.

We believe the market might be underestimating the risks the financial system faces. Not only do we expect negative loan growth for two years in a row but the housing market appears to be more than 30% overvalued, which might trigger markdowns going forward. In our view, there is a risk reported NPLs might be underestimated to the order of 30–40% and we believe the slowdown in NPL formation is partly related to restructurings. The current level of provisions (2.8% of total loans) covers only 16% of the exposure to developers, which we believe is insufficient going forward as in some cases developer loans exceed 4.5x core capital and depending how the potential losses in the sector evolve over time.

While we acknowledge the banks’ good capital position and solid revenue generation and have no concerns about solvency in the listed banks we cover, we believe that none of the domestic banks we cover will obtain returns above their cost of capital over the next two years and that the Cajas, due to falling margins and rising provisions, might lose €€ 2.5bn during 2010, leading to the potential restructuring of the sector.

The full 68-page note is well worth a read, but some of the points made jump out at us since we’ve heard them before — notably from the now-infamous Variant Perception Spanish bank note.

In that report, boutique investment house Variant claimed that Spain’s banks “are hiding their losses” by restructuring some loans, their exposure to troubled property developers could be very high, and provisioning for expected losses might end up being too low to fully offset actual losses.

Credit Suisse echoes those points on Thursday:

[Non-performing loans] —a big problem? We believe that, based on the assets acquired and loans restructured by the financial institutions over the past two years, there is a risk that reported NPLs could be underestimated to the order of 30–40%. In our opinion, it is possible that problems may have been deferred over time, with negative consequences for the future profitability of the sector.

. . .

Current provisions are insufficient, in our opinion. The provisions currently available in the financial system (specific and generic) cover just 16% of total exposure to developers (and we calculate there are €1.5trn in other loans that will also require provisions), which we believe is not enough considering that, in some cases, exposure to developers is higher than 4.5x reported core capital. Losses in the 1993 crisis approached 15% of the exposure to developers. The exposure is now 5.0x 18 February 2010 Spanish Banks 2010 4 bigger in relative terms and the current provisions set aside by the banks (around 5% of the developers’ loans) might not be enough, in our view. Final losses will likely depend on the markdowns over the next two to three years.

In the interests of objective journalism we have posted the full Credit Suisse note in the Long Room. You can also view the Variant note, and a counter-argument from Iberian Equities, here.

If you’re Spanish and particularly sensitive we suggest you confine yourself to reading this.


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