Among all the hand-wringing about Dutch, French and German elections this year, one good news story is going largely unnoticed: that of Spain. More specifically, the remarkable recovery of Spanish banks.
Rating agency S&P on Thursday raised its long-term ratings on three Spanish banks and the long- and short-term counterparty ratings on two. The three banks that have seen their long-term ratings upgraded are privately owned Ibercaja Banco, Abanca Corporacion Bancaria and BFA Tenedora de Acciones, while the two that had their counterparty ratings raised are Bankinter (BKNIY) and Bankia (BNKXF) .
Perhaps more encouraging than these actions are the comments accompanying them. The S&P analysts believe the Spanish banking system "has largely absorbed the credit cost of the bursting of the real estate bubble and subsequent deep economic recession."
The analysts expect the remaining impact from provisions for bad loans to be limited, adding that the economy is much stronger and the property market has been gradually recovering, which is helping banks.
They estimated that between the end of 2008 and the end of last year, Spanish banks recognized provisions equivalent to 15.5% of the loan book outstanding at the beginning of that period -- a "massive" amount, S&P stated.
Still, credit losses peaked in 2012 and have been consistently falling since then. But this doesn't mean the banks don't need to work through the remaining bad loans; it just means they are now manageable if conditions remain good.
The S&P analysts estimate that the stock of nonperforming loans could amount to 11% of total loans by the end of next year; they still represent a risk if the economic situation worsens.
Under the current conditions (no presidential victory by France's Marine Le Pen, for instance), the analysts forecast economic growth of 2.3% this year and 2% next year for the Spanish economy, which would help cut the fiscal deficit and public debt and further lower the cost of borrowing.
More than a year ago, I wrote about measures that quietly were introduced in Spain and other European countries to make it easier to forgive mortgage debt. Essentially, these measures aimed to make mortgage lending more similar to what is happening in the U.S., where banks take some of the hit if the value of the home collapses.
One of the main reasons the recovery in Europe has been so slow is that a mortgage borrower remains saddled with the rest of the debt if the bank repossesses the home and sells it for a lower price than it was bought. The case of Spanish banks seems to offer a way out of this issue. Investors should keep an eye on how things evolve there for a possible blueprint for how other countries in the area might try to solve their own bad debt problems.
Should investors venture into these Spanish banks? Let's take a quick look at those that have New York-listed ADRs, which offer easier exposure to U.S. investors (all data from FactSet, calculated taking into account the main Spanish listings of the stock).
Bankinter is trading at a trailing 12-month price/earnings multiple of 13.2 vs. its five-year average of 17.5, and over the past year its stock has advanced by more than 20%. Santander, which saw its stock price climb a healthy 43% over the past year, is trading at a trailing 12-month P/E of 12.4 compared with its five-year average of 15.7.
CaixaBank is at a P/E of 19.2 vs. its five-year average of 29.9, after posting a one-year stock price advance of 31%. Bankia, which has risen 22% over the past 52 weeks, seems to be the most expensive, trading at a 13.7 P/E vs. its five-year average of 14.
It looks like there is still room for growth. Investors who like risk and would like to take advantage of the weak euro due to the political worries in the eurozone could dare to step in to the market for Spanish banks.
However, another risk to watch for is of the litigious kind. Late last year, a new law ruled in favor of about 1.5 million Spanish bank customers, who lost out when interest rates fell because they were sold mortgages with clauses that put a floor under interest rates. This means that Spanish banks might be in line to pay out as much as €4 billion ($4.25 billion) in damages.
The banks already have made provisions for this and, since the issue has been known for some time, it may well be factored into the price. Still, it adds to the uncertainty around these stocks, and it is something of which investors should be aware.