Tragedy? Or Strategy

Presciently, seeing as she might find a partial answer in this post (which has been rolling around our head for a number of days), Izabella Kaminska of FT Alphaville asks with regards to Santander's large voluntary write-down of real estate assets:

So what prompted Santander to suddenly brace itself for a 32 per cent depreciation of the property-assets acquired? A sudden realisation they were potentially worth so much less, or a prudent smoothing-out of potential losses to come?

We originally planned to write this commentary with respect to the BBVA provisioning which struck a blow to Spanish banking shares last week. The fact that Emilio Botín has jumped on the same bandwagon only adds weight, we think, to our argument.

This writer had found himself a touch perplexed at the very negative prognostications regarding Spanish real estate and construction emanating from BBVA's Economic Research Department over the last six months, or so - headlined by predictions that property prices had only dropped one-third of the amount needed in order to normalize the market. In English parlance, this type of statement coming from a bank with lots of real estate and related loans on its books would be though of as 'shooting itself in the foot'.

On the other hand, one might consider this supine acceptance of reality as a direct investment in future Spanish domestic banking share. Both BBVA and Santander certainly believe they can blow off the façade without bringing down the entire building. They also know that many, if not most, of the cajas (which handle a large proportiion of domestic business) will be forced to respond in kind. Being, as we pointed out earlier, up to their earbows in loans to builders and developers, they will not be able to do so without replenishing capital - zombies in their purest form will result. When legitimate demand for credit reappears, the two biggies will be among the few able to avail themselves of it.

As an aside, in the wake of today's release of Santander's results, the market awarded them a 9.4% thrashing - and BBVA 7.5%. The average beating that index constructors took was about equal to this latter. We'd suggest that the market has not quite got it. The hidden subtext here is that it will not be as easy for builders as it was to roll over debt they have limited prospects of repaying.

While the reader - having done his or her own homework - waits to get long both of these banks, he or she might consider spreading them against the most indebted builders.

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