BBVA’s Q409 results showed that its underlying operations were strong. Its operating income increased 29% YoY to €3bn and its cost-income ratio improved from 44.6% in 2008 to 40.4% in 2009. Unsurprisingly given the problems affecting the Spanish and US economies, its non-performing loan ratio increased from 2.3% at end-2008 to 4.3% at end-2009 – not a bad level compared to Spanish peers (at end-H109, Bank of Spain data showed that non-performing loans across the entire financial sector had reached around 4.6% of total loans). And it increased its Tier 1 ratio from 7.9% at end-2009 to a much healthier 9.4% at end-2009. Given this positive background, how did BBVA manage to post Q409 net income of just €31mn – a 94% YoY drop – when consensus expectations had been for a figure of roughly €1.1bn?

There were two principal causes for BBVA’s poor headline result: US exposure (at €45bn, BBVA’s US assets represented around 8% of total assets at end-2009) and a desire to clean up its balance sheet before heading into 2010. In the US, BBVA took a €998mn pre-tax goodwill impairment charge in Q409 and €533mn of extraordinary provisions arising from commercial real estate exposures. Elsewhere, BBVA set aside €300mn in Q409 for early retirements, increased provisions against various foreclosed or acquired assets in Spain by €200mn and increased loan-loss provisions against non-performing assets by €164mn in Spain & Portugal and €73mn in Mexico.

Just as JPMorgan’s Q409 earnings report identified key trends that would affect the whole US banking sector, such as decreased investment banking revenues and lower credit losses (see link), we believe that problems similar to those BBVA encountered could afflict other large international European lenders over the coming quarters. We would draw particular attention to the goodwill impairment and the extra provisions taken against commercial real estate. We believe that several lenders could suffer goodwill writedowns as they acknowledge the damage done to the value of some of their franchises by the financial crisis, which would clearly hit net profits and market sentiment at a time when it is imperative for the financial system to avoid further shocks. As for commercial real estate, this was the asset class singled out in the IMF’s recent GFSR update as one of the most likely to inflict further losses on banks. Unlike residential property, commercial real estate shows few signs of stabilising. Finally, we should not forget that the weaker investment banking results that hit US banks in Q409 will almost certainly prove to be an international phenomenon, leading to decreased revenues for lenders such as Barclays, Deutsche Bank and BNP Paribas.

BBVA’s results thus provide a salutary reminder that, while the worst of the downturn has now probably passed, it still has a nasty sting in its tail with the capacity to surprise. BBVA’s sudden goodwill write-off showed starkly just how much value has been destroyed by the crisis, while its bad experience with commercial real estate gave tangible evidence that the IMF’s warning is not to be taken lightly. BBVA’s experience is unlikely to be a one-off – indeed, SocGen recently startled investors with news of an unexpected €1.4bn writedown on CDOs. Complacency is a luxury that European banks and their investors clearly can not yet afford. There are more shocks in the offing.

Nick Smallwood, Credit Analyst

Disclaimer:

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