On a recent trip through Madrid, Spain we had the opportunity to speak to most of the publicly traded Spanish banks, as well as the Bank of Spain. The Hamilton Capital Global Bank ETF (HBG) which is outperforming its benchmark by 14.4%1, has ~3% exposure to Spanish banks, while the Hamilton Capital Global Financials Yield ETF (HFY), which is outperforming its benchmark by over 6%, has a similar ~3% exposure to Spanish banks.
Below are our key takeaways:
- Hola, loan growth? Although not quite there yet (and banks suggesting it will be more of a 2019 story), there was talk of positive net loan growth in Spain. In fact, two of the smaller domestic banks have already registered year-over-year growth in Q1 2018. [The last time total loans grew in Spain, year-over-year, was 2010, according to BBVA Research.]. The Bank of Spain noted that the huge run-up in credit pre-crisis, particularly in real estate, combined with the ECB’s asset purchase program (which has reduced large firms’ dependence on banks for funding) has reduced the country’s credit needs in recent years, notwithstanding a booming Spanish economy. However, this long adjustment cycle appears to be over, and future growth appears to be in sight.
- Focus is on efficiency, improving businesses, growing organically: Notwithstanding the differences in footprint, size and business model, a common theme throughout the meetings was the focus on improving their businesses – be it a focus on improving efficiency through increased digitization and branch rationalization, expanding the product shelf via wealth management, or continued management of NPAs. There was no real discussion of political environment or economic concerns (at least, domestically) – a welcome change from other meetings on the same weeklong trip across Europe.
- Capital positive events expected to reduce costs, benefit shareholders: Several of the smaller banks continue to operate under the Standardized Approach capital model [read: higher capital requirements], but in all cases have efforts underway to gain approval for an IRB [Internal Ratings-based Approach] model [read: lower capital requirements]. Although the process for approval can be long, each seemed optimistic with the progress to date. Planned uses for the capital were to help offset costs associated with jobs cuts (as banks look to improve their efficiency ratios through branch and personnel reductions), but also to raise payouts ratios or possibly pay special dividends.
- Two approaches to shedding non-performing loans/assets (NPL/NPA) – bulk sales or 1×1: There was a definitive difference in the approach toward dealing with NPAs across the Spanish banks. The larger international banks (SAN, BBVA) have opted for bulk sales recently to private equity and other specialist investors. In contrast, most of the more domestic players indicated a preference for smaller sales (even 1×1). Why? They believe they could recover more value than via bulk sales, and seemed satisfied with their approach as long as the Spanish labor market continues to strengthen. Importantly, no bank suggested pressure from the ECB, a fact backed up by comments from the Bank of Spain.
- Domestic M&A less likely than International: Consensus was that opportunities for any significant consolidation in Spain are limited if not over. M&A since the crisis has – not surprisingly – been largely stress-driven. One CEO noted that today deals are harder to get done, with deals that look “good in a spreadsheet” much more difficult to consummate in reality; that said, the same CEO indicated his bank was “not committed to independence forever”. In contrast, Spanish banks with an international footprint cited M&A interest in sub-scale areas, including the UK and parts of Latin & South America.
Both the Hamilton Capital Global Financials Yield ETF (HFY) and the Hamilton Capital Global Bank ETF (HBG) are well diversified by country (generally over 15) and by number of holdings/positions (generally over 50).
1 Benchmark outperformance for HBG and HFY is as of April 30th, 2018.
Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.