Spanish Lenders Continue to Tidy Up

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So far the US earnings season has been positive, with the major US banks being the outperformers to date – both Goldman Sachs and Bank of America strongly beat profit estimates and JP Morgan posted record Q2 profits. However, here in Europe, despite credit facing a challenging first half of the year, the bank sector is also continuing to slowly but surely improve with balance sheets being consistently enhanced.

That trend continued this morning as Banco Sabadell announced an agreement to sell a gross amount of €9.1bn of its real estate assets (€3.9bn net book value) to the US private equity group, Cerberus. Sabadell has endured some negative headlines over recent months, due to the well-publicised IT meltdown at its UK subsidiary, TSB Bank, but this transaction effectively reduces the Spanish lender’s non-performing asset book from 10% to 5.4%, bringing it in line with the two major Spanish lenders, Santander and BBVA.

The trade clearly enhances the credit metrics of the bank, increasing its CET1 ratio by 13bp to 12.13% (compared to earlier estimates which presumed a sale of the real estate assets would result in a hit to the CET1 ratio), and should be seen as a positive step by the rating agencies.

The headlines may have come during the quiet summer period when the news will be over-shadowed by the current geopolitical events dominating the media, but we see this as another illustration that the bank capital sector continues to offer investors an opportunity to hunt for relative value in a world where yield remains a scarce commodity.

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