Should You Avoid Investing in Danish, Irish and Spanish Banks?

Investors fled from Irish bank stocks during the credit crisis last year. The real estate bubble collapse in Ireland and the overall slump of the Irish economy added more losses for Irish banks. The third largest bank in Ireland, Anglo Irish Bank was nationalized back in January this year. Ireland saved the other two large banks - Bank of Ireland (IRE) and Allied Irish Banks, plc (AIB).

An article in ft.com/alphaville yesterday suggests that Ireland, Spain and Denmark may get into trouble because of their banks’ high loans to deposits ratio and loans to GDP ratio.

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In Something is rotten in the state of Denmark. And Ireland. And Spain, Tracy Alloway quotes research by UBS analysts John-Paul Crutchley and Alastair Ryan on the European banking industry.

From the article:

“That is loans to deposits (y-axis) and loans to GDP (x-axis) by European country. A higher loan to deposit ratio implies the nation’s banking system is relatively over-lent — it has made available more credit to the private sector than can be sustained by the deposit base within the country. A high loan to GDP ratio suggests the economy is increasingly over-borrowed, or the private sector has borrowed excessively in relation to the country’s economic ability to sustain the debt. In short, you don’t really want to be in that upper right hand quadrant.

Here’s what the analysts say:

Countries and households can be over-borrowed and banking systems can be overlent. Both of these are found in the economies with the highest private-sector debt to GDP levels: Spain, Ireland and Denmark. These are also the economies we expect to deliver the weakest GDP out-turn over the next year. Ireland is already a significant creditor to the ECB and debt maturities mean Spain may follow suit, particularly if “round-tripping” to help fund government deficits continues.”

Spanish banks Banco Santander (STD) and BBVA (BBV) have significant overseas operations which must help with some of the losses from the domestic market. Danske Bank of Denmark trades on the OTC markets with ticker DNSKY.PK. Danske reported losses for the second quarter last month and noted "write-offs from bad loans could hamper profitability for the rest of the year."

Comments

[Chancer:]

It is my understanding that the Irish government is buying the toxic assets from Irish banks (IRE and AIB) which is why their share prices have risen recently.

Sep 27 03:39 PM

[Senan:]

Yes they are buying the toxic assets. But they are also buying the good assets...leaving the banks with what...capital. The idea is that this capital can then be used to kick on the economy through lending. But without nationalisation there's no guarantee the banks will lend out the money. So I wouln't rule out this, which could wipe out any investment.

Sep 27 04:19 PM

[CLH:]

When the banks or any stock goes up --sell. When it goes down --buy. This is investing 101.

Sep 27 06:52 PM

[ArtfulDodger:]

Banco Santander (STD) could easily be one of the top five banks in the world, in my opinion.

It's a great dividend payer and prides itself in being able to pay it. The company has judiciously moved into Latin America, has a great balance sheet, and is in fact one of the few banks in the world with zero LTD.

Long STD and plan to stay there.

Sep 28 04:15 AM

[Alan Young:]

There's nothing new about these risks; it was all priced in 6-10 months ago. Why would we be worried about it now?

Sep 28 04:15 PM

[tripleblack:]

I tend to agree. Its also important to note that these bank's ratio to GDP is distorted BECAUSE they have successfully fielded loan portfolios to customers in other countries. This analysis seeks to penalize them for this. Banks which operate only within their own national boundaries could be viewed from this perspective, however.


On Sep 28 04:15 AM ArtfulDodger wrote:

> Banco Santander (seekingalpha.com/symbo...) could easily
> be one of the top five banks in the world, in my opinion.
>
> It's a great dividend payer and prides itself in being able to pay
> it. The company has judiciously moved into Latin America, has a great
> balance sheet, and is in fact one of the few banks in the world with
> zero LTD.
>
> Long STD and plan to stay there.

Sep 28 05:14 PM

[Kinabalu:]

I hope Banco Santander has a heavy reserve for its Bernie Madoff exposure.


On Sep 28 04:15 AM ArtfulDodger wrote:

> Banco Santander (seekingalpha.com/symbo...) could easily
> be one of the top five banks in the world, in my opinion.
>
> It's a great dividend payer and prides itself in being able to pay
> it. The company has judiciously moved into Latin America, has a great
> balance sheet, and is in fact one of the few banks in the world with
> zero LTD.
>
> Long STD and plan to stay there.

Sep 28 07:54 PM

[Paul Harper:]

Dodger ... I refer you to past articles. Also the upcoming IPO
of it's Brazilian unit, should rais eplenty of cash to add to Tier1
capital.
In Spain, it is mostly the smaller regional banks that have been
caught in the property trap with bad mortgages, Santander has
been canny in its acquisitions, particularly in the UK, where it is
now number 3 from a standing start 4 years ago.

Long as you like on STD.


On Sep 28 04:15 AM ArtfulDodger wrote:

> Banco Santander (seekingalpha.com/symbo...) could easily
> be one of the top five banks in the world, in my opinion.
>
> It's a great dividend payer and prides itself in being able to pay
> it. The company has judiciously moved into Latin America, has a great
> balance sheet, and is in fact one of the few banks in the world with
> zero LTD.
>
> Long STD and plan to stay there.

Sep 29 03:54 AM