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Spain's big 2 in the doldrums, but Santander outperforms BBVA

Spain'stwo big internationalized banks have much in common, including origins inprovincial northern port cities, a concentration on traditional retail banking,and big bets on Latin America that allowed them to negotiate their homecountry's housing crisis with relative comfort. Now and share something else: ROEs of roughly 7% that are well below thedouble-digit levels of pre-Lehman Brothers times.

Bothbanks face margin pressure from low interest rates and lack of credit demand intheir home market, as well as deteriorating economic conditions in the emergingmarkets on which they relied in the past. Their net interest margins are justbelow 2.5% and their capital ratios are below 11%, weak by the standards oftheir international peers although high enough, the Spanish banks argue, fortheir conservative business models.

Yetalthough Banco Santander's first-quarter net profit dipped almost 5% compared to a year earlier,it exceeded analysts' estimates by 8%. BBVA's net interest income fell3% short ofexpectations and net profit slid 53.8% year over year, although thedecline was 11.6%, in constant exchange rate terms, after excluding the sale ofpart of a stake in China CITICBank Corp. Ltd. Year-over-year comparisons of BBVA's figures werealso distorted by it having fully consolidated in thethird quarter of 2015, helping explain its 13.7% rise in total assets.

BBVAmay now struggle to meet its full-year guidance for Spanish net interestincome, executives told analysts.

Andwhile Santander seems to be coping better than expected with a strugglingBrazil at a time when BBVA's oil and gas provisions caught investors by surprise,Santander is also running a tighter ship. The similarity between the companies'performance metrics fades when it comes to cost-to-income ratios, withSantander's 50% being 9 percentage points below BBVA's.

Withtight margins and greater opportunities to shift business from physicalbranches onto digital channels, both of the banks are looking to drive theseratios lower. Mobile banking could allow BBVA to its Spanish branch network byalmost three-quarters, according to CEO Carlos Torres Vila, and a union hasreported that Banco Santander plans to close 425 branches in the country in2016.



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