Better late than never, here is the Macro Spanish bank research. Due to the time and resourced that the hacker caused me, I fell behind in both research, strategizing, and publishing to the blog. Since this piece is not as timely as it could be, I am making it a freebie - all you have to do is register. This is a whopper piece of research as well, including sample currency hedging/speculating samples, a full macro analysis, and my usually rigorous forensic analysis of the company itself. Let this serve as an example of what subscribers get at the pro and institutional level.

Reggie Middleton on Banco Bilbao Vizcaya Argentaria SA (BBVA)

The current financial crisis, being proclaimed as the worst since the Great Depression, has virtually pounded financial systems across the world. Fear of a global crash amid a worsening macro-economic environment and mounting loan losses have hampered nearly all efforts to restore calm in the global markets as the exposure of leading banks became unmanageable. Declining housing and stock prices, and rising unemployment levels are squeezing consumer wealth globally and are expected to weigh heavily on the banking system in the form of rising loan defaults. Until very recently, the global banks have experienced most of the impact in the form of distressed securities, capital shortages and funding problems, however the problems have now started to engulf their consumer and commercial loan portfolios as well.

In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and consumer loan portfolio. The Spanish real estate sector is making a high horsepower a U-turn after years of a massive housing bubble that has burst - culminating in an unemployment rate that has risen to an outrageous 13.4% level. The power skid is showing no signs of reaching an inflection point, and we believe is only in the beginning throes of a sharp downturn. In addition, the banks' other key growth areas including Mexico, the U.S and South America are witnessing a slowdown in economic activity, restricting BBVA's growth prospectus amid the current turbulent environment. With increasingly challenging economic conditions in each of these economies, BBVA's asset quality has deteriorated sharply with non-performing loans rising to 36% of its tangible equity without corresponding (equal) increase in provisions. As the bank deals with these tough times ahead, we expect BBVA's bottom line growth to remain subdued due to a slower credit off-take and higher provisions in the coming quarters.

Key Highlights

Sharp slowdown seen in Europe - According to the European Commission forecasts, the European economy is expected to contract 1.9% in 2009 with a modest recovery in 2010. Spain, in particular, is expected to be one of the worst hit due to the humbling of its housing sector which had, for several years, been a significant contributor to the country's economic growth. This will impact BBVA by slowing down its credit and loan growth in addition to significantly deteriorating the credit quality of its loan portfolio.

BBVA's asset quality is set to deteriorate rapidly as Spain enters recession - Problems in Spain are more pronounced than in most of its European counterparts. The Spain's budgetary deficit has already crossed the 3% threshold limit set by the European Commission and is expected to cross 6% by 2009, only behind Ireland. The unemployment has reached a 12-year high of 13.4% in November 2008, the highest in the Euro zone, while the real estate sector bubble (particularly residential vacation homes purchased by foreigners), the pillar of economic growth engine, has burst. BBVA, with nearly 40% of its total loan exposure tied to real estate & construction loans and individual loans in Spain could see massive deterioration in its asset quality.

Besides Spain the bank has to deal with other challenging economies including Mexico and the U.S - In 3Q2008, U.S and Mexico contributed nearly 29% and 16% of total revenues, respectively. The downturn in the U.S economy is showing no signs of stabilization, with an unabated fall in housing prices and frozen credit markets continuing to shatter consumer confidence. Recession in the U.S has also led to a sharp slowdown in Mexico which is highly dependent on US for exports and remittances. The slowdown in both of BBVA's key markets will not only impact the pace of BBVA's growth but also augment the risk profile for the bank as it now has to deal with vagaries of these economies to navigate itself in these turbulent times.

BBVA's NPAs have skyrocketed on back of economic slump - Since January 2008, BBVA's non-performing loans have increased 92% to €6.5 bn. As at the end of 3Q2008, BBVA's loan losses as a percentage of tangible equity stood at an astonishing 36%. Eyles test, a measure of banks' delinquent loans (net of reserves) as percentage of its tangible equity, has increased to 12% in 3Q2008 from 4% in 2Q2008. This sharp rise in the bank's NPA levels, particularly in context of its lower equity cushion, could substantially erode shareholders' equity.

Inadequate provisioning to impact BBVA's bottom line - Owing to deteriorating loan portfolio, BBVA's NPAs have almost doubled to 2.0% of the total loans in 3Q2008 from 1.1% in 3Q2007. Despite an increase in NPAs, the bank's provision has declined to 2.3% of the total loans from 2.4% a year ago. As loan losses are expected to increase in the wake of economic slowdown, BBVA will have to increase its provisions considerably, denting its near-to-medium term net income.

BBVA's valuation at... Register (for free) and download the full report pdf Banco Bilbao Vizcaya Argentaria SA (BBVA) Professional Forensic Analysis 2009-01-28 16:04:04 439.80 Kb

For those who haven't been to the Spanish coastal areas to see for themselves or are not familiar with the Spanish situation, I have included random research on Spain from pundits around the Globe!

1. Spain Facing 'Exceptional' HardshipEU Observer
2. Spain: Overall analysis ( 369,54 KB ) la Caixa
3. The economy in 2009: out of The Twilight Zone ( 160,73 KB )
4. Spain: Dies Irae; Beyond the real estate crisis Société Générale Economic Research
5. The IMF on Spain
6. An adjustment in Spanish saving has begun - JP Morgan
7. Economic Survey of Spain 2008 - OECD
8. Spain: The Worst Is Yet to Come - Morgan Stanley Global Economic Forum
9. Spain: First GDP contraction in 15 years (-0.2% q/q in Q3 2008) - BNP Paribas
10. Quarterly Report On The Spanish Economy: Spain's GDP Contracted 0.2% in Q3 Compared to Q2 - The Bank of Spain
11. Inflation Is Dead In Spain, Fasten Up Your Seat Belts For A Sharp Dose Of Deflation - A Fistful of Euros
12. Spain: External imbalances persist, fiscal surplus disappears - European Commission Autumn 2008 Forecast
13. Macro: Construction Correction Driving Economy Down - Morgan Stanley - Global Economic Forum

I've also decided to include some illustrative hedging/speculative samples that I will intermittently include in future reports, time and resources permitting. I will be releasing a timely report on a UK insurer in 24 to 48 hours to subscribers. The insurer still has a little meat left on the bones. BBVA, due to the recent and uncalled for run-up in banks may be for the risk takers in my constituency, though.

The Spanish Bank Short Arbitrage View

Below is an illustrative analysis for investment in BBV put options along with different hedging scenarios. These examples are for the purposes of illustration only, and are not in any way to be considered, or intended to be construed as, investment advice. I want it to be know that this work sample has not been proofread, and to be honest I probably may not have the time to do so. Continue at your own risk. The Pound and Euro trade now has a diminished risk/reward proposition from a speculative perspective (not so as a hedge). Those of you who attended the BoomBustBlog Boat rides should have heard me express my opinions that I believed the Pound, Euro and oil would all head sharply southward. That was 7 months ago, and this is now. I still have opinions on the aforementioned, but they haven't been thoroughly and empirically vetted. I have included the currency argument in the downloadable PDF located at the end of this article, for any who may be interested.

In the current working model we have taken at-the-money put options for BBV (with strike price of $12.5) and at-the-money EURO options (with strike price of 1.365). According to information available on NYSE and Bloomberg BBV had option series for January, February, April and July. We have conducted analysis for February and July expiration series for above at-the-money options. (However my proprietary model - not to be confused with commercial models that I may use and are available through popular vendors - is built dynamically to change strike price, premium and the hedge ratio (currently 3:1) in the highlighted orange cells to conduct similar analysis for any other option chains). We have sourced option pricing data for BBV from Bloomberg and Currency Options from CME Group.

This sample assumes the following:

We have conducted scenario analysis for change in underlying BBVA (in Euros) and change in currency based for four hedging circumstances -

Position Currency Risk

•1) Un-hedged BBV Put Options - Appreciation of Euro (thru ADR)

•2) BBV ADR Put with Long EURO Put - Appreciation of Euro (on ADR as well as loss of put premium)

•3) BBV ADR Put with Long EURO Call - Appreciation of Euro (thru ADR) however offset by Euro Long Call

•4) BBV ADR Put with Long EURO Put and Long EURO Call (Straddle) - Appreciation of Euro (thru ADR)

•5) Un-hedged Short BBV - Appreciation of Euro (thru ADR)

•6) Short BBV with Long Futures - Hedged position

The payoff matrix for each of the position is given below.

BBV ADR Put with Long EURO Put, and Un-hedged BBV put options would provide same pay-off matrix (in terms of direction). However with depreciation of Euro strategy with long Euro Put would provide better returns to investors. On other hand BBV ADR Put with Long EURO Call would provide more diverse risk exposure compared to BBV ADR Put with Long EURO Put. The above strategy would provide returns when BBVA underlying declines (investor will only lose call premium) and would also provide returns when Euro Appreciates (investor will only lose call premium). The last strategy BBV ADR Put with Long EURO Put and Long EURO Call provides pay off similar to strategy with BBV ADR Put with Long EURO Call except that it would provide lower returns in exchange of added diversification.

Download the full addendum here: pdf Banco Bilbao Vizcaya Argentaria SA (BBVA) Addendum - Pro 2009-01-28 17:48:27 569.55 Kb