Sunday, October 18, 2009

Are the Spanish banks hiding their losses? Looking at the American data

Great post from Bronte Capital

Whether the Spanish banks are hiding their losses is a major debate going on in the blogosphere and has been detailed at length in the Financial Times. The stakes are very high – this is a debate about the stability of the Eurozone and possibly of Europe itself.


But there seem to be four variants.

(a). The Spanish banks are telling the truth – and this is a storm in a teacup,

(b). The Spanish banks are doing a normal amount of bank over-optimism in the face of a crisis – and whilst the banks are really stretched (but not telling us) the banks are ultimately solvent – and the European experiment is fine,

(c). The Spanish banks are in fact diabolical – and the losses are maybe 15-20 percent of a year of Spanish GDP – in which case a bailout by (effectively) German taxpayers is possible or

(d). Variant Perception is in fact unreasonably bullish – and Spain will collapse economically and socially and we will be thankful if all we get back is someone like the Generalissimo. The modern European experiment will be deemed to fail because a single European Union with a single currency can’t hold together in a crisis because Germany won’t or can’t bail out Spain, Italy and Greece in a crisis.

Instinctively I am in camp (b) above. However I acknowledge all of the above are possibilities.


he instant conclusion is that BBVA has higher delinquencies than the competition but has lower loan loss provisions and is charging less off than the competition. This conclusion is robust almost no matter how you cut the BBVA USA data. I think we can safely conclude that BBVA is hiding its losses. If anything it is slightly worse than the above indicates because nobody in their right mind thinks that the comparables (larger American regional bank holding companies) are honestly stating their losses. But if the comparables are understating losses then BBVA is understating them more.

This puts me firmly into camps (b), (c) or (d) above. The question is no longer whether they are hiding the losses – but whether the scale of problems (in Spain) is sufficient to cause major political ructions or whether it is just an issue for the stock market. [Disclosure: I am short BBVA and the position is modestly painful as the stocks have appreciated.]

Read the rest