Spanish Banks: Deleveraging and the misallocation of capital

- "We are cutting our rating on SAN to Neutral from Outperform and reducing our target price to €11.75 from €12.25. While SAN has emerged as one of the main winners in the current financial crisis, we are concerned that it is now so big that structural growth is likely to decline and it may face marginally declining returns. We note Brazilian profitability might be slowerthan-expected."
- "We continue to have a cautious view on the Spanish economy and the domestic banks. An overleveraged private sector and structurally high unemployment are likely to affect banking results. We think the banking system is facing a significant deleverage process and the adjustment in the real estate sector is not yet complete which will likely translate into higher credit losses. We think the structural profitability of the banking system has been permanently impaired and we do not expect the domestic banks to meet their cost of capital in the next two years at least. Money illusion relating to negative real interest rates is partly responsible for the lack of recognition of certain credit losses and for unusually high (and unsustainable, in our view) net interest income relating to the carry trade."
- "The Cajas sector has started restructuring but this might be a long process. We think the market is underestimating the execution risk and costs associated with the integration process. We believe some institutions might lose money and require extra equity over time."
- "SAN is one of the leading banking franchises in Europe, in our opinion, but we believe that any excess capital generated is likely to be directed to increase size through non-organic growth; this strategy may not necessarily create value for shareholders in the long term. We believe it would be more difficult for the shares to continue to outperform."
- "Stock Calls: We maintain our Underperform rating on all the pure domestic Spanish banks we cover and our Outperform rating on BBVA."

CreditSuisse Spanish Banks 20100922

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