Stocks of Europe’s biggest banks have outpaced Europe’s most important market indices in the past year. This out-performance happened while the banks were working towards strengthening their balance sheets to abide by newly implemented Basel III rules. Some of these banks have been restructuring their operations by shrinking their workforce and businesses. Spanish banks are fiercely competing for market share in their home country to manage their liquidity in a sluggish economy. Their exposure to Spain’s real estate sector prompts the question of whether there could be big impairments in their equity values, since non-performing assets could be wrongly valued. The following are some cases worth mentioning.
Focusing on wealth management
The bank has reduced its charges from litigation in its last quarter, contributing to its recent earnings improvement. Nevertheless, new reports stated that it will be under investigation by French authorities to verify if the bank helped French citizens evade taxes.
Also, to manage liquidity, Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) placed a €4.500 million debt on several markets in the first quarter. This amount is not worrisome, as it represents a 3% of its total debt amount and as Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) has maintained a steady relationship between debt and assets. A third of its revenue is concentrated in Europe, while a total 58% is concentrated on emerging markets. This provides the bank with satisfactory regional diversification, although it has experienced some negative currency effects in the last quarters on its income statements.
Focus on dividend sustainability
One of the main questions is whether the bank can maintain its current dividend yield, which is above 8% and higher than its peers’. This yield sustains part of its current valuation, amid the uncertainty surrounding its core operations.
Although UBS AG (ADR) (NYSE:UBS) appears to be enjoying a turnaround in its operating inefficiencies and to have solved its capital problems, it would be wise to have more insight into its potential new litigation with the French authorities.
It would be wise to avoid Spanish banks until there’s a clearer view on the housing market and its impact on banks’ loans, although both Banco Santander, S.A. (ADR) (NYSE:SAN) and BBVA have big exposures to emerging markets and have globally diversified portfolios. Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) is a good bet for a recovery in Spain’s economy if the bank continues to reduce its exposure to the country’s real estate, while Banco Santander, S.A. (ADR) (NYSE:SAN) showed more pressure on its operations that could hurt its high dividend yield, its main attraction in comparison to its peers. Both banks are trading at a discount with respect to their book values, justified by current uncertainty regarding their non-performing loans.
Vanina Egea has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Vanina is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article 3 European Banks: A Review originally appeared on Fool.com is written by Vanina Egea.
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