resumen_spanish_banks

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Please refer to important disclosuresat the end of this report.

www.exanebnpparibas-equities.com

Spanish banksBanks: Neutral 17 March 2011

Equity Research

Report

Delenda Carthago (Problem acknowledged?)

Investment recommendations

We initiate coverage on the Spanish banking system with an Outperform rating on

Santander (TP EUR10.75), Neutral rating on BBVA (TP EUR10.00) and

Underperform ratings on Popular (TP EUR4.00), Sabadell (TP EUR2.60), Banesto

(TP EUR6.75), Bankinter (TP EUR3.50) and Pastor (TP EUR3.00). The domestic

banks are trading at an average 0.9x 2011 P/TBV (for an expected ROTE of 6%) and

at 15.0x 2011E adj. P/E. SAN and BBVA are trading at an average 1.4x 2011E P/TBV

(for an expected ROTE of 17%) and at an average of 8.5x 2011E adj. P/E.

Many of the problems plaguing the financial system are being addressed

Spains banks are tackling many of the weaknesses that were exposed by the

financial crisis, while laws have been passed to strengthen solvency and allow Cajas

in need of capital to tap private investors.

The concentration process might backfire on the Cajas

We estimate that the lower profits related to the loss in market share and the cost of

reducing payrolls could be as large as all the help received by the Fund for Orderly

Bank Restructuring (EUR11.5bn). In our view the system might need EUR26bn in

extra capital (beyond the funds already committed) for a total EUR55bn bail-out.

No reason to turn optimistic on any domestic Spanish banks

Spains banks might find 2011 the most challenging year since the beginning of the

crisis. Economic growth will be soft and unemployment high, while the banks might be

hit with impairments and have profitability levels unlikely to surpass the cost of capital.

Only SAN merits an Outperform rating. BBVA rated Neutral

Santander offers diversified growth with a resilient business model, one of the highest

ROTE of any European bank, comfortable liquidity and decent solvency levels. BBVA

might be affected by the dilution embedded in the acquisition of Garanti and by

questions around the long term strategy.

Santiago Lpez Daz, CFA [email protected]

(+34)91 114 83 10

[email protected]

Rating Price* TP Upside(EUR) (EUR) (%)

Santander + 8.3 10.8 30BBVA = 8.8 10 13Popular - 4.33 4.00 (8)Banco Sabadell - 3.15 2.60 (17)Banesto - 6.8 6.8 (0)Bankinter - 4.88 3.50 (28)Banco Pastor - 3.50 3.00 (14)

* Priced at 14 March 2011

Sector relative to DJ STOXX50

0

100

200

300

400

500

Jan 08 Jan 09 Jan 10 Jan 11

Relative to DJ STOXX50 (rebased) Banks


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2 Spanish banks

Contents

Investment Case _________________________________________ 3Valuation _______________________________________________ 7Still a fragile economic environment _________________________ 12The Investment Case. The Financial system___________________ 20The large (not so Spanish) banks ___________________________ 37Santander story still looks attractive ______________________________________ 37Cajas. We still have a problem _____________________________ 47Where are we now? __________________________________________________ 47Capital needs. Is that all? ______________________________________________ 54Santander _____________________________________________ 57Santander story looks attractive _________________________________________ 57BBVA _________________________________________________ 60Neutral on BBVAs shares _____________________________________________ 60Popular________________________________________________ 63Better solvency but limited profitability ____________________________________ 63Banco Sabadell _________________________________________ 66GUI integration during 2011 ____________________________________________ 66Banesto _______________________________________________ 69Pressure on earnings _________________________________________________ 69Bankinter ______________________________________________ 72Capital increase _____________________________________________________ 72Banco Pastor ___________________________________________ 75Exposure to problematic sectors_________________________________________ 75


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3 Spanish banks

Investment Case

Cato the Elder (a Roman Consul, 234BC-149BC) was said to always end his speeches

with some variation of the expression Carthago delenda est (Carthage must bedestroyed) even if he had not been discussing Carthage. His purpose was to remind the

Romans that their number one priority was to destroy the city that almost annihilated

Rome around 215BC. As we all know, Carthage was indeed destroyed (in 146BC), thus

settling the problem forever. Similarly, anybody writing about Spanish banks over the past

few years could have finished with We need to acknowledge the problems.

It is undeniable that since the beginning of the crisis four years ago steps have been

taken to address the most pressing problems confronting Spains financial system. The

situation is completely different today. Institutions have written down part of their loans,

strengthened their capital and improved funding. The financial system has provisioned

an amount equivalent to 10% of GDP to deal with deteriorating credit quality.

Spains financial system has embarked on the most important restructuring in its history

to improve efficiency and smooth banks access to the funding markets. A new law

strengthens solvency and allows Cajas in search of capital to accept investment from

private investors. Those institutions that do not reach the new levels of capital required

also have the alternative of receiving funds from the FROB.

Having said that, we see no reason to turn optimistic on any of the domestic Spanish

banks we cover. Spains banks might find 2011 the most challenging year since the

beginning of the crisis. Economic growth will be soft and unemployment high, while the

countrys banks will face impairments related to credit losses, a mortgage bubble and

profitability levels unlikely to surpass the cost of capital in the medium term. Downside

is more limited now that the companies have better capital ratios and after the 60%

decline in the share prices over the past three years, but we remain cautious eventhough domestic bank shares are trading at an average 0.9x 2011E P/TBV.

The Spanish economy is still very vulnerable, in our opinion, despite signs of

improvement in certain indicators. The EU expects Spain to grow below the EU average

for at least four years in a row and below the annual 2.0% growth threshold we deem

necessary for the country to create jobs. Growth in economies like Germany is likely to

positively affect the Spanish economy, as will some of the austerity measures recently

taken, which go in the right direction. However:

Private sector debt could cloud the economic outlook: The ECBs negative real

interest rate policy paved the way for economic growth but fuelled the private credit

bubble. Households and companies borrowed excessively and their debt levels swelledto record highs (116% of GDP). We estimate that private sector debt as a % of GDP

might decline by at least 20 full percentage points over the next 3-5 years. Spanish

Government debt as a % of GDP seems to be manageable (70% by the end of 2011)

but refinancing costs are likely to be quite sensitive to Spanish country risk

Unemployment remains Spains biggest and most intractable problem: The

unemployment rate has surpassed 20% three times during the past 25 years and has

averaged 16.4% since 1980. The unemployment rate has tripled in three years to

20.3% (in 1.3m families all the members are unemployed and 2.1m people have been

unemployed for more than a year) and the country has experienced a 2.1m reduction in

the number of employed since 2007). The size of the informal economy is big, but in-

depth reform is needed to enhance labour market flexibility.


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4 Spanish banks

Figure 1: A third-world rate of unemployment

Spain: Monthly increase in registered unemployed (000) Spain: Unemployment Rate

131

68

(100)

(50)

0

50

100

150

200

Jan05

May05

Sep05

Jan06

May06

Sep06

Jan07

May07

Sep07

Jan08

May08

Sep08

Jan09

May09

Sep09

Jan10

May10

Sep10

Jan11

20.3%

5%

10%

15%

20%

25%

1Q80

2Q81

3Q82

4Q83

1Q85

2Q86

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1Q00

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4Q08

1Q10

Series1

Source: INE, Ministry of Labour

A major de-leveraging effort is needed. The loan book in Spain multiplied by 3.5x

from 2000-2007; during this time, lending to developers increased 12.5x, a 37% annual

average rate. Loan growth turned negative in August 2009 and is likely, in our view, to

remain at depressed levels in the short to medium term.

We believe that house prices are still 25% overvalued. Mortgage rates have been

negative in real terms during the past two years, which has helped to maintain the

bubble given that 100% of Spains mortgages are floating rate indexed (the affordability

index has improved from 42% of disposable income to 26.5%). House price to income

ratios (6.6 years) and nationwide rental yields (implying a 26.5x P/E) remain quite

expensive in absolute and relative terms (25% above the 1995-2008 average). We also

estimate a 1.1m oversupply of houses (four years of sales at the current pace) and we

are concerned about tail risk given that 16% of all the mortgages issued between 2005-

2007 had a LTV>80% and 3.9% of all the residential mortgages have a LTV>100%.

NPLs are still an issue. NPL formation is slowing but we believe reported numbers do

not reflect the systems true credit quality. 1) Should all the provisions available in

Spain be allocated to the developer exposure, they would cover just 20% of the risk to

the sector; 2) some of the harsh assumptions in the July Stress Test might actually

materialise and minor variations in the expected losses versus expectations could have

serious implications for the solvency of some institutions.

Figure 2: Something is not adding up

Loans to real estate developers Construction sector and developer loans: NPL ratio

17%

168%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Sep-83

Dec-84

Mar-86

Jun-87

Sep-88

Dec-89

Mar-91

Jun-92

Sep-93

Dec-94

Mar-96

Jun-97

Sep-98

Dec-99

Mar-01

Jun-02

Sep-03

Dec-04

Mar-06

Jun-07

Sep-08

Dec-09

0%

50%

100%

150%

200%

250%

As a % of total loans (LHS) as a % of equity (RHS)

0%

2%

4%

6%

8%

10%

12%

14%

Mar99

Mar00

Mar01

Mar02

Mar03

Mar04

Mar05

Mar06

Mar07

Mar08

Mar09

Mar10

Developer NPL ratio Construction NPL ratio

Source: Bank of Spain


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5 Spanish banks

The liquidity and capital positions have improved and seem to be manageable

among the listed banks, although costs are likely to remain high. The deposit war

is easing and the net lending from the ECB has been reduced. More than 50% of the

outstanding medium and long term debt matures after 2013 (with less than 3.0% of

liabilities maturing p.a.). The LTD ratio has improved by 38pp during the past three

years but uncertainties surrounding the country risk and volatility in the wholesale

funding markets could clearly put Spanish institutionsunder severe stress.

According to our estimates, banks could have core Tier 1 ratios approaching 10.0% by

2013, which seems reasonable considering the impairment charges booked, the capacity

to absorb additional losses and a moderate 53bp average deduction related to Basle 3.

According to our estimates, the ROTE on the major listed banks is likely to decline

by close to 40% during the next three years versus the 2007-2010 period. We expect

ROTE to average 10.0% (7.6% among domestic banks), below the cost of capital (except

for SAN and BBVA). Revenue generation is likely to be negatively affected by a lower

contribution from ALCO portfolios (10% of NII) and by generic provisions. After releasing

EUR4.2bn of generics during 2010 (equivalent to 53% of the PBT), there are onlyEUR2.5bn of generics left, and these might last less than two quarters.

The crisis has triggered the largest banking restructuring ever seen in Spain with the

original 45 Cajas giving way to 17 groups. The recent legal changes aim to reinforce

solvency and to facilitate the entrance of private investors. Core capital of 8% will be

required (10% under certain circumstances) and those banks that cannot increase their

capital on the market (they have until September to do so) could apply to the FROB.

The final numbers are unknown but the most extensive process of concentration in the

history of the country is likely to be, in our opinion, the most expensive too:

a) As we are in uncharted waters, unusually large losses are a possibility. We

estimate that if the Expected Losses in the construction and developer book are 100bp

worse than the current stress test estimates and 50bp worse in the rest of the portfolio,Cajas could need EUR6bn in provisions, equivalent to close to 10% of their equity.

b) The concentration process might backfire. A 20% reduction in the Cajas

capacity (5,000 branches) would imply a very significant loss in market share.

Assuming spreads are maintained, every 1% loss in market share implies, according to

our calculations, a 7% reduction in after tax profits. More importantly, restructuring

costs are underestimated, in our opinion. The cost of having employees take early

retirement, incurred as part of the SAN and BBVA mergers with Central Hispano and

Argentaria, represented 19% and 15% respectively of the two groups consolidated net

income for five years. Restructuring the Cajas is likely to be significantly more

expensive. We expect an 18% reduction in the number of employees (24,000 people)

with a potential cost of EUR7bn. If we combine the two effects (10% loss in market

share and 18% reduction in employees), the amount represents EUR11bn, similar to allthe help provided by the FROB and equivalent to 2-3 years of profits.

c) On March 10th

the Bank of Spain disclosed that 12 institutions would need

to raise EUR15.1bn in capital to comply with the new capital requirements.

However we estimate that the system might need an additional EUR26bn (beyond

the funds already committed) for a total bail-out of the Cajas of EUR55bn. The key

point, in our opinion, is to find out what the right level of capital (and provisions) might

be to restore confidence among international institutional investors (note that we say

institutional, not domestic retail investors) so an investment in a local bank might

become a credible option. The issue is not the capital needed to survive, in our view,

but the capital position on a going concern basis that promotes private investment.


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6 Spanish banks

We believe the SAN story still looks attractive and it is the only company we rate

as Outperform. The company offers 1) diversified growth with a resilient business

model. We expect EUR31bn in profits in the 2011-2013 period, with nine different

business areas contributing more than 5% each to the bottom line (Spain represents

less than 20% of valuation), 2) we estimate an average 19% ROTE in the 2011-2013

period (with an average annual Tangible Equity per share growth of 9% and a 7.2%

dividend yield), 3) comfortable liquidity and solvency. Santander has average maturities

of 1.7% of total assets pa from 2011-2015 and a EUR100bn discount capacity available

at central banks. We expect SAN to accumulate 45bps of core capital per year and

estimate a 9.3% core Tier 1 capital ratio by the end of 2013 after absorbing a 75bp hit

related to Basle 3.

The story is not immune to a double dip scenario and to an increase in risk aversion to

emerging markets, and we see some potential problems: 1) credit risk is concentrated

in markets that have credit quality pressure (70% of the loan book is in Continental

Europe and the UK), 2) the bank only has EUR768m of generic provisions left in Spain

and 3) capital allocation and long-term strategy could be an issue given that the

acquisition-led business model is highly capital intensive.

We rate BBVA Neutral. Turkey is quite an interesting medium-term option but it is

dilutive in the short term. Additional synergies in an already efficient and profitable bank

might be marginally more difficult to achieve and the path to control is still some years

away. The long-term potential of the market is significant and BBVA might diversify its

earnings mix, but concerns about the embedded dilution and what appears to be a

relatively rich valuation might impact the share price.

Going forward, we expect the bank to report EUR16.1bn in profits in the 2011-2013

period (with Spain representing 25%-30% and Latam and Turkey 60%) with an

average ROTE close to 16%. The company is reporting a slowdown in NPL

formation, has no major liquidity issues and could accumulate 66bp of core capital pa

over the next three years for an 11.6% ratio by the end of 2013 (enough to deal with

a Basel III impact of 60bp).

We believe, however, that the unusually high rates of return of 2004-2008 are likely to

decline by 40% and we expect EPS to fall by 11% in 2011 due to the acquisition of

Garanti. In our view the major medium-term problem for the share price is related to the

corporate strategy, as some of the banks major strategic decisions over the past few

years could be questioned, like the creation of the US franchise (2% return on capital

employed after four years), the exit of the Brazilian market and the failure to close the

acquisition of BNL after launching a tender offer in 2005.


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7 Spanish banks

Valuation

Figure 3: Spanish Banks Valuation Table.

Limited upside

Current Target P/TBV 2011E 3Y TE Adj. P/E 3Y EPS 2011ERating Price Price Upside 2010 2011E 2012E ROTE CAGR 2010 2011E 2012E CAGR GDY

Santander Outperform 8.30 10.75 30% 1.6 1.5 1.3 19% 9% 8.6 8.1 6.9 9% 7.2%

BBVA Neutral 8.80 10.00 14% 1.5 1.3 1.2 16% 11% 7.9 8.8 7.8 2% 4.8%Popular Underperform 4.33 4.00 -8% 0.9 0.9 0.8 7% 4% 11.1 13.0 10.9 5% 5.0%Sabadell Underperform 3.15 2.60 -18% 1.0 1.0 1.0 6% 1% 11.8 16.5 11.8 3% 3.6%Banesto Underperform 6.80 6.75 -1% 0.9 0.8 0.8 8% 6% 10.2 10.3 8.3 15% 4.9%Bankinter Underperform 4.88 3.50 -28% 1.1 1.0 1.0 6% 3% 15.3 18.7 16.7 6% 3.0%Pastor Underperform 3.50 3.00 -14% 0.7 0.7 0.7 4% 4% 14.6 16.7 10.6 11% 1.2%

Average -4% 1.1 1.0 1.0 10% 5% 11.3 1 3.2 10.4 7% 4.2%

Source: Exane BNP Paribas estimates. Numbers and multiples consider a fully diluted number of shares

Figure 4: SAN's 1yr forward valuation

10.75 per share valuation

Equity Net Profit Return on PV per Implicit Implicit

RWA Allocated 2013E All. Equity COE Valuation share () P/E13 P/BV 13 % Total

Continental Europe 307,057 27,206 3,927 14.4% 11.6% 33,830 3.6 8.6 1.2 32%Santander 84,734 7,202 1,211 16.8% 11.5% 10,528 1.1 8.7 1.5 10%Banesto 69,667 5,922 408 6.9% 11.5% 3,546 0.4 8.7 0.6 3%Consumer Finance 68,558 6,513 1,030 15.8% 11.5% 8,953 0.9 8.7 1.4 9%Portugal 28,170 2,535 432 17.0% 11.9% 3,632 0.4 8.4 1.4 3%Other 55,929 5,034 846 16.8% 11.8% 7,171 0.8 8.5 1.4 7%

UK 103,475 8,795 2,254 25.6% 11.0% 20,490 2.2 9.1 2.3 20%

Latam 211,806 20,647 6 ,919 33.5% 11.9% 58,176 6.2 8.4 2.8 56%Brazil 129,036 12,258 4,269 34.8% 11.8% 36,175 3.8 8.5 3.0 35%Mexico 26,855 2,551 1,053 41.3% 11.8% 8,923 0.9 8.5 3.5 9%Chile 29,081 2,617 957 36.6% 11.8% 8,114 0.9 8.5 3.1 8%Other 26,834 3,220 640 19.9% 12.9% 4,964 0.5 7.8 1.5 5%

Sovereign 46,687 3,968 624 15.7% 11.5% 5,422 0.6 8.7 1.4 5%

Operating areas 669,025 60,617 13,723 22.6% 11.7% 117,918 12.5 8.6 1.9 113%Corporate activit ies 58,620 11,893 -2,234 -18.8% 11.5% -13,402 -1.4 6.0 -1.1 -13%

Total 727,644 72,510 11,490 15.8% 11.7% 104,516 11.1 9.1 1.4 100%

Implied Value 2013 104,516Per Share 11.571 yr. Forward NPV 9.49NPV 2011-12 DPS 1.26Target Price 10.75

Source: Exane BNP Paribas estimates

Figure 5: SANs net income estimates by business unit

2011E-2013E net income estimates by operating unit

(EURm) 2008 2009 2010 2011e 2012e 2013e

Continental Europe 4,668 5,031 3,885 3,815 3,873 3,927

Santander 1,907 2,005 1,243 1,181 1,193 1,211Banesto 694 738 419 398 402 408Consumer Finance 696 629 811 908 981 1,030Portugal 531 531 456 420 426 432Other 840 1,128 957 909 872 846

UK 1,247 1,726 1,985 2,084 2,188 2,254

Latin America 3,609 3,833 4,804 5,657 6,283 6,919

Brazil 1,769 2,167 2,836 3,403 3,811 4,269Mexico 600 495 682 832 957 1,053Chile 545 563 683 806 887 957Other 695 609 603 615 628 640

Sovereign - -25 424 560 594 624

Operating areas 9,523 10,565 11,099 12,116 12,938 13,723

Total 8,876 8,943 8,181 9,015 10,864 11,490

Source: Exane BNP Paribas estimates, company data. Total includes negative results in the corporate centre


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8 Spanish banks

Figure 6: BBVA's 1 yr forward valuation

10.00 per share Valuation

Equity Net Profit Return on PV per Implicit Implicit

RWA Allocated 2013E All. Equity COE Valuation share () P/E13 P/BV 13 % Total

Spain and Portugal 134,703 11,450 1,759 15.4% 11.5% 15,294 3.2 8.7 1.3 29%

Mexico 48,904 4,646 2,376 51.1% 11.5% 20,658 4.3 8.7 4.4 39%Banks 39,652 3,767 1,926 51.1% 16,750 3.5 8.7 32%Pension and insurance 9,253 879 449 51.1% 3,908 0.8 8.7 7%

South America 33,619 3,698 1,108 30.0% 12.0% 9,232 1.9 8.3 2.5 17%Banks 26,194 2,881 863 30.0% 7,193 1.5 8.3 14%Pension and insurance 7,426 817 245 30.0% 2,039 0.4 8.3 4%

USA 37,491 3,187 412 12.9% 11.0% 3,748 0.8 9.1 1.2 7%

Wholesale and AM 79,079 8,303 994 12.0% 12.0% 8,282 1.7 8.3 1.0 16%Corporate 46,629 4,896 586 12.0% 4,884 1.0 9%Global markets 12,321 1,294 155 12.0% 1,290 0.3 2%Other 20,129 2,114 253 12.0% 2,108 0.4 4%

Turkey 16,000 1,760 552 31.4% 12.4% 4,454 0.9 8.1 2.5 8%

Corporate centre 9,892 8,652 -1,281 11.5% -8,645 -1.8 -16%

Group 359,689 41,696 5,920 14.2% 11.6% 53,023 11.2 9.0 1.3 100%

Implied Value 2013 53,023Per Share 11.151 yr. Forward NPV 9.15

NPV 2011-12 DPS 0.86Target Price 10.00


Figure 7: BBVAs net income estimates by business unit

2011E-2013E net income estimates by business unit

(EURm) 2008 2009 2010 2011e 2012e 2013e

Spain and Portugal 2,565 2,275 2,070 1,760 1,724 1,759

Mexico 1,938 1,357 1,707 2,033 2,251 2,376

Banks 1,733 1,117 1,390 1,668 1,834 1,926

Pension and insurance 210 246 317 365 416 449

South America 727 780 889 993 1,049 1,108

Banks 689 678 732 783 822 863

Pension and insurance 67 137 191 210 227 245

USA 211 -950 236 318 382 412

Wholesale and AM 773 852 950 949 967 994

Corporate 353 421 506 532 558 586

Global markets 129 283 142 146 150 155

Turkey 465 511 552

Group 5,020 4,210 4,606 4,769 5,443 5,920


Figure 8: Domestic Banks Valuation

Returns below the cost of capital

POP SAB BTO BKT PAS

DPS ()2011E 0.22 0.11 0.33 0.15 0.042012E 0.26 0.16 0.41 0.17 0.072013E 0.30 0.17 0.50 0.22 0.072014E 0.39 0.19 0.55 0.24 0.062015E 0.39 0.21 0.56 0.25 0.07

2020E (m)T. Equity 11,637 7,841 8,916 3,638 3,026RoTE 9.2% 9.1% 8.8% 7.6% 6.4%Ke 11.5% 11.5% 11.5% 11.5% 11.5%Implied P/TBV 0.8 0.8 0.8 0.7 0.6T. Equity Value 9,285 6,215 6,858 2,417 1,684Expected value of dividends 4,532 3,062 3,272 1,263 781

1 yr forward NPV Valuation (m) 6,289 4,114 4,637 1,657 1,018Per Share () 4.00 2.60 6.75 3.50 3.00



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9 Spanish banks

We value all the Spanish banks using a sustainable Return on Tangible Equity (ROTE)

approach. We adjust earnings to eliminate extraordinaries and non banking

subsidiaries and consider any excess / deficit of capital plus dividends. We then value

equity assuming a zero rate of growth beyond our explicit forecast period as the market

is unwilling to give banks credit for such development. Our SOTP approach for SAN

and BBVA is based on sustainable Returns by division.

The sector is trading at an average of 1.0x P/TBV, but we expect returns below the cost

of capital for the next three years for the domestic banks. We estimate that only SAN

and BBVA will be able to beat their cost of capital in the short to medium term.

An index of the pure domestic banks has outperformed the SX7P over the past 10

years. Most of the outperformance was related to the evolution during the bubble years.

In absolute terms, domestic banks have declined by 40% over the past decade.

Figure 9: Historical P/E and PBV

Banco Popular Banco Sabadell

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

12m P/E

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x12m P/BV

P / BVPS (rhs) P/E (lhs)

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

Apr-01 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10

12m P/E

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x12m P/BV


Source: Exane BNP Paribas, Factset

Figure 10: Historical P/E and PBVBankinter Banco Pastor

7.0x

12.0x

17.0x

22.0x

27.0x

32.0x

Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

12m P/E

0.0x

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

12m P/BV


6.0x

11.0x

16.0x

21.0x

26.0x

Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

12m P/E

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

12m P/BV


Source: Exane BNP Paribas, Factset

Figure 11: Historical P/E and PBV

Banesto Current Valuation versus 10 Year Historical Average

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10

12m P/E

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

12m P/BV


P/E P/Bv P/E P/Bv P/E P/Bv

Popular 11.7 0.7 11.8 2.3 -1% -70%

Bankinter 14.1 0.8 16.2 2.3 -13% -65%

Sabadell 16.2 0.8 13.0 1.5 25% -47%

Pastor 14.0 0.6 14.1 1.6 -1% -63%

Banesto 9.0 0.8 11.3 1.8 -20% -56%

Average 13.0 0.7 13.3 1.9 -2% -60%

Current 10Y Historical Avg. Diff. Versus Hist. Avg.

Source: Exane BNP Paribas, Factset-consensus


10/27

10 Spanish banks

The domestic banks we cover are trading at an all time low in terms of Price to Book,

but that does not mean the stocks are cheap. It is true that the P/BV multiple stands

61% below the historical average but the ROE has declined, on average, in the same

proportion. Domestic banks trade, on average, at a 3% premium versus the past 10

years average in terms of P/E, and more importantly, a similar premium is also

maintained should we compare the ROTE with the P/TBV (see the figure below)

Figure 12: Domestic Spanish Banks Relative Evolution

Spanish Local banks versus SX7P Domestic Spanish Banks ROTE / P/TBV

-

20

40

60

80

100

120

140

160

180

200

Apr01

Oct01

Apr02

Oct02

Apr03

Oct03

Apr04

Oct04

Apr05

Oct05

Apr06

Oct06

Apr07

Oct07

Apr08

Oct08

Apr09

Oct09

Apr10

Oct10

SX7P Local Banks Index

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

Jul06

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Jan10

Apr10

Jul10

Oct10

Jan11

Source: Exane BNP Paribas

Both SAN and BBVA have outperformed the SX7P over the past 10 years (although

SAN is the only bank to have posted a positive total return). The two companies are

trading at an average of 1.4x 2011 P/TBV with expect returns above 17%, according to

our estimates. Comparing the current P/TBV with the expected ROTE we see that both

companies are trading close to their historical averages.

Figure 13: SAN and BBVA relative evolution. Historical P/E and PBV

Santander BBVA

3.0x

5.0x

7.0x

9.0x

11.0x

13.0x

15.0x

17.0x

19.0x


12m P/E

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

12m P/BV


3.0x

5.0x

7.0x

9.0x

11.0x

13.0x

15.0x

17.0x

19.0x

21.0x


12m P/E

0.0x

0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

4.5x

5.0x

12m P/BV


Source: Exane BNP Paribas


11/27

11 Spanish banks

Figure 14: SAN and BBVA relative performance

SAN and BBVA versus SX7P (10 years) SAN and BBVA:ROTE / P/TBV

-

20

40

60

80

100

120

140

160

Jan00

Jul00

Jan01

Jul01

Jan02

Jul02

Jan03

Jul03

Jan04

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Jan11

SX7P SAN BBVA

5.0

10.0

15.0

20.0

25.0

30.0

Jan05

Apr05

Jul05

Oct05

Jan06

Apr06

Jul06

Oct06

Jan07

Apr07

Jul07

Oct07

Jan08

Apr08

Jul08

Oct08

Jan09

Apr09

Jul09

Oct09

Jan10

Apr10

Jul10

Oct10

Jan11

SAN BBVA

Source: Exane BNP Paribas, Bloomberg

Figure 15: EPS estimates versus consensus

Slightly below consensus

Exane EPS Versus Consensus

Company 2011e 2012e 2011 2012

SAN 1.00 1.18 -1% 2%

BBVA 1.01 1.14 -2% -5%POP 0.34 0.41 4% -4%SAB 0.20 0.27 7% 3%BTO 0.66 0.82 -4% 0%BKT 0.26 0.29 -11% -13%PAS 0.21 0.33 -2% 5%

Average -2% -2%


Figure 16: Spanish banks at a glance

Main 2011E ratios

2011E SAN BBVA POP SAB BTO BKT PAS

P&L2011e vs 2010 GrowthLoans (gross) 5.6% 2.5% 1.0% 1.3% -0.3% 0.8% 0.2%NII 3.8% 1.5% -7.7% 6.8% -7.8% -7.1% -4.6%Operating Profit 4.4% 0.7% -11.7% -4.7% -8.7% -8.8% -5.7%EPS (stated) 6.9% -10.7% -17.7% -29.2% -0.7% -18.2% -11.9%

NIM 2.62% 2.57% 1.84% 1.69% 1.38% 0.96% 1.58%Cost Income 43% 43% 42% 55% 42% 62% 53%

Risk Premium (bp end period) 130 130 140 109 90 44 85ROA 0.7% 0.8% 0.4% 0.3% 0.4% 0.3% 0.2%ROTE (stated) 18.6% 16.1% 7.1% 6.4% 8.3% 5.9% 4.4%

BALANCE SHEETLTD (gross ex repos) 124% 152% 162% 156% 149% 217% 189%Loans / Assets 60% 62% 78% 76% 63% 77% 75%Deposits / Liabilities 52% 50% 47% 57% 44% 36% 54%RWA / Assets 51% 59% 73% 63% 55% 56% 60%NPL ratio 4.1% 5.0% 6.6% 6.6% 5.5% 3.6% 7.0%Coverage 69% 60% 43% 54% 61% 62% 49%Core Capital 9.0% 10.1% 9.5% 8.9% 8.6% 8.4% 10.2%Tier 1 10.2% 11.0% 9.7% 10.1% 9.6% 9.1% 12.4%

PRODUCTIVITYEmployees / Branch 12.6 14.5 6.9 7.4 5.1 12.6 6.9Business / employee (m) 9 7 12 14 16 15 10



12/27

57 Spanish banks

SantanderBanks Spain

Outperform

Target price EUR10.8 (+30%)

Sector rating Neutral

Santander story looks attractivePrice (14 March 2011) EUR8.3Market cap./Free float (EURbn) 74.8/73.63m avg. volume (EURm) 542.7Reuters/Bloomberg SAN.MC/SAN SM

Financial data 12/10 12/11e 12/12e 12/13e

Adjusted EPS (EUR) 0.96 1.02 1.20 1.24Reported EPS (EUR) 0.94 1.00 1.18 1.22EPS - IBES (EUR) 0.94 1.07 1.26 1.39BVPS (EUR) 8.51 8.94 9.47 10.01Tangible BVPS (EUR) 5.22 5.66 6.21 6.78DVPS (EUR) 0.60 0.60 0.72 0.76

Net att. profit rep. (EURm) 8,181 9,015 10,864 11,490Net att. profit adj. (EURm) 8,418 9,227 11,064 11,690Tangible BV (EUR) 46,021 51,092 57,406 64,080ROTE adj. (%) 19.1 19.0 20.4 19.2Equity Tier 1 Ratio (%) 8.8 9.0 9.5 10.0

Stockmarket ratios* 12/10 12/11e 12/12e 12/13e

P/E (x) 9.8 8.1 6.9 6.7P/BVPS (x) 1.11 0.93 0.87 0.83P/Tangible BVPS (x) 1.81 1.46 1.33 1.22

- High (x) 2.30 1.65 - -- Low (x) 1.40 1.31 - -Net yield (%) 6.4 7.2 8.7 9.2Payout (%) 62.3 58.6 60.3 61.7* Yearly average price for FY ended 12/10

Performance* (%) 1w 1m 3m 12m

Absolute 0 (5) 0 (17)Rel. Banks 1 (0) (1) (13)Rel, DJ STOXX50 3 0 2 (19)* In listing currency, with dividend reinvested

Santiago Lpez Daz, CFA

(+34)91 114 83 10

[email protected]

SAN offers diversified structural growth with a resilient

business model

We expect the company to report EUR31bn in profits in the 2011-

2013 period with 9 different business each representing more than

5% of the bottom line.

The bank has high profitability levels and Tangible Equity

per share growth

We estimate an average 19% ROTE in the 2011-2013 period and

a 9% p.a. Tangible Equity per share growth over the next three

years

Comfortable solvency and liquidity

Liquidity seems manageable with average p.a. medium and long

term maturities of 1.7% of total assets from 2011-2015 and we

estimate the company could close 2013 with a core capital ratio

above 9.0% after consider the potential impact of Basle 3.

Some issues to monitor

We are concerned about the concentration in problematic markets

and pressure on earnings and, more importantly, about the capital

allocation and the long term strategy if size is pursued at the

expense of shareholder value creation.

Price relative to DJ STOXX50

0

5

10

15

20


Relative to DJ STOXX50 Santander


13/27

59 Spanish banks

Price at 14 Mar. 11 / Targe t Price

EUR8.3 / EUR10.8 +30%Analyst: Santiago Lp ez Daz (+34)91 114 83 10 Banks (Neutral) - Spa in

Com pany Highlights EURm

Market c apitalis ation 74,785

Free f loat 73,589

3m average volume 543

Performance (*) 1m 3m 12m

Absolute (5%) 0% (17%)

Rel. Sec tor (0% ) (1% ) (13% )Rel. DJ STOXX50 0% 2% (19% )

12m Hi/Lo (EUR) : 10.8 -23 % / 7 .3 +1 3%

CAGR 2000/2011 2011/2013

EPS restated (**) 8% 10%

Book value 6% 6%

Price (yearly avg from Dec. 00 to Dec. 10) 10.4 9.6 7.4 6.8 8.1 9.2 11.4 13.0 10.4 8.6 9.4 8.3 8.3 8.3

PER SHARE DATA (EUR) Dec. 00 Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11e Dec. 12e Dec. 13e

No of shares year end, basic, (m) 4 ,5 60 .0 0 4 ,6 59 .0 0 4 ,7 68 .4 0 4 ,7 68 .4 0 6 ,2 54 .3 0 6 ,2 54 .3 0 6 ,2 54 .3 0 6 ,7 43 .1 3 8 ,4 82 .8 9 8 ,7 17 .6 6 8 ,8 17 .9 5 9 ,0 30 .9 5 9 ,2 43 .9 5 9 ,4 56 .9 5

No of shares (avg), d iluted, restated for t reasury s tock 4,205.81 4,564.16 4,727.96 4,768.40 4,950.40 6,254.30 6,254.30 6,407.99 7,315.93 8,613.50 8,744.12 9,013.20 9,226.20 9,439.20

Reported EPS 0.5 0.5 0.5 0.5 0.7 1.0 1.2 1.4 1.2 1.0 0.9 1.0 1.2 1.2

Adjusted EPS 0.5 0.5 0.5 0.5 0.7 0.9 1.1 1.3 1.2 1.1 1.0 1.0 1.2 1.2

% change 0.0% 13.1% ( 6.2%) 8.2% 24.6% 34.0% 27.0% 20.3% ( 8.8%) (11.7%) (10.4%) 6.3% 17.1% 3.3%

Book value (BVPS) 4.6 4.9 5.0 5.3 5.5 6.4 7.2 8.2 6.8 7.9 8.5 8.9 9.5 10.0

Tangible BVPS 1.5 2.3 2.6 3.4 2.6 3.5 4.2 5.6 4.2 4.8 5.2 5.7 6.2 6.8

Net dividend 0.3 0.3 0.3 0.3 0.3 0.4 0.5 0.7 0.6 0.6 0.6 0.6 0.7 0.8

STOCKMARKET RATIOS (x) YEARLY AVERAGE PRICES for end Dec. 00 to Dec. 10 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11e Dec. 12e Dec. 13e

P / E adjusted 22.9 18.6 15.3 13.1 12.5 10.6 10.3 9.7 8.6 8.0 9.8 8.1 6.9 6.7

P / E relative to DJ STOXX50 (%) 113% 77% 69% 82% 89% 80% 92% 89% 64% 69% 92% 83% 79% 81%

P / GOP 8.05 6.75 5.96 5.32 6.27 6.47 6.25 5.61 4.01 3.22 3.46 3.00 2.89 2.86

P / BVPS 2.28 1.95 1.47 1.30 1.48 1.45 1.59 1.59 1.54 1.09 1.11 0.93 0.87 0.83

P / Tangible BVPS 6.76 4.12 2.85 2.02 3.18 2.61 2.68 2.31 2.48 1.77 1.81 1.46 1.33 1.22

High (x) 7.60 4.97 3.78 2.58 3.50 2.95 3.15 2.49 3.24 2.47 2.30 1.65

Low (x) 5.96 2.78 1.76 1.38 2.82 2.37 2.31 2.09 1.22 0.82 1.40 1.31Net yield (%) 2.6% 3.0% 3.9% 4.4% 4.1% 4.5% 4.6% 5.0% 6.1% 7.0% 6.4% 7.2% 8.7% 9.2%

Payout (%) 60.0% 56.0% 59.7% 57.9% 51.1% 47.7% 47.0% 48.8% 52.0% 55.9% 62.3% 58.6% 60.3% 61.7%

Payout on NAP reported (%) 50.9% 53.0% 60.7% 55.3% 45.7% 41.9% 42.9% 46.0% 52.1% 57.8% 64.1% 60.0% 61.4% 62.8%

P & L HIGHLIGHTS (EURm) Switch to IFRS data f rom FY ended 12/05 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11e Dec. 12e Dec. 13e

Net interest income 7,865 9,708 8,885 7,517 7,172 10,334 12,084 14,882 21,579 26,299 29,224 30,323 31,937 33,052

Net fees and commissions 4,013 4,622 4,289 4,171 4,727 6,256 7,223 8,040 9,204 9,080 9,734 10,069 10,404 10,682

Trading profit 702 685 356 999 1,100 1,562 2,180 2,998 2,666 3,423 2,606 2,658 2,711 2,766

Other income 1,179 1,070 753 849 999 1,181 1,129 1,174 869 580 485 469 460 470

Total Revenues 13,759 16,086 14,284 13,535 13,999 19,333 22,615 27,095 34,318 39,381 42,049 43,519 45,513 46,970

Personnel costs (4,451) (5,258) (4,522) (4,049) (4,221) (5,619) (6,004) (6,510) (7,908) (8,450) (9,330) (9,518) (9,757) (10,052)

Other operating costs (2,965) (3,374) (3,027) (2,595) (2,513) (3,787) (4,092) (4,475) (5,985) (6,374) (6,926) (7,100) (7,279) (7,499)

Depr ec iation and a mortis ation ( ex cl. goodw ill) ( 900) ( 987) (890) ( 763) ( 834) (1,017) ( 1,151) (1 ,268) ( 1,40 0) ( 1,596) ( 1,940) ( 1,998) (2,058) (2,0 99)

Total cos ts (8,316) (9,619) (8,438) (7,407) (7,568) (10,424) (11,247) (12,253) (15,293) (16,421) (18,196) (18,616) (19,094) (19,649)

Ope rating profit be fore provisions 5,443 6,466 5,846 6,128 6,431 8,909 11,369 14,842 19,025 22,960 23,853 24,903 26,419 27,320

Bad debt charge (1,048) (1,586) (1,648) (1,496) (1,586) (1,615) (2,467) (3,470) (6,663) (9,484) ( 10,258) ( 10,210) (9,074) (9,048)

Other provisions

Associates

Others

Profit be fore tax, gdw and e xce ptionals 4,395 4,880 4,198 4,632 4,845 7,294 8,902 11,372 12,362 13,477 13,595 14,693 17,345 18,272

Amt of goodw ill 0 0 0 0 0 - - - - - - - - -

Ex ceptional items (1,063) (1,144) (1,090) (845) (322) 776 1,242 600 (573) (1,682) (1,570) (1,437) (1,369) (1,376)

Profit be fore tax 3,332 3,737 3,108 3,787 4,522 8,070 10,144 11,972 11,789 11,795 12,025 13,257 15,976 16,896

Tax (715) (910) (723) (869) (526) (1,320) (1,986) (2,392) (2,440) (2,336) (2,923) (3,182) (3,834) (4,055)

Minorities (359) (340) (138) (307) (390) (530) (562) (520) (473) (516) (921) (1,061) (1,278) (1,352)

Net attributable profit (NAP) reported 2,258 2,486 2,247 2,611 3,606 6,220 7,596 9,060 8,876 8,943 8,181 9,015 10,864 11,490

Net attributable profit adjuste d 1,916 2,351 2,283 2,492 3,225 5,461 6,933 8,544 8,894 9,251 8,418 9,227 11,064 11,690

BALANCE SHEET HIGHLIGHTS (EURm) Dec. 00 Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11e Dec. 12e Dec. 13e

Customer Loans 169,384 173,822 162,973 172,504 346,551 402,918 484,790 533,751 617,231 664,146 715,621 763,409 800,963 835,792

Securities 22,755 24,695 24,989 31,108 156,277 228,153 209,121 203,149 200,737 221,675 242,997 245,975 252,509 259,222

Intangibles 13,849 1 2,037 1 1,630 8,903 1 8,390 1 7,680 1 8,279 1 7,329 21,923 2 6,397 2 8,997 2 9,681 3 0,170 3 0,573

Other assets 142,940 1 47,584 1 24,617 1 39,276 1 43,268 1 60,357 1 21,682 1 58,686 2 09,740 1 98,311 2 29,885 2 36,566 2 42,607 2 47,326

Total as sets 348,928 358,138 324,208 351,791 664,486 809,107 833,873 912,915 1,049,632 1,110,529 1,217,501 1,275,631 1,326,249 1,372,914

Customer Deposits 145,551 142,936 130,463 132,748 262,670 291,727 314,377 317,043 406,015 487,681 581,385 665,765 714,979 750,379

Shareholder's funds (excl treasury shares) 20,884 22,847 23,958 25,061 34,415 39,778 44,852 55,200 57,587 68,667 75,018 80,773 87,577 94,654

Tangible Book Value 7,035 10,810 12,328 16,159 16,025 22,099 26,572 37,871 35,664 42,269 46,021 51,092 57,406 64,080

KEY DATA (EURm) Dec. 00 Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11e Dec. 12e Dec. 13e

Risk w e ig ht ed a sset s ( Pr evail in g r eg ula to ry r eg ime ) 1 99 ,0 63 2 04 ,4 46 1 85 ,2 90 2 05 ,2 53 3 40 ,9 46 4 12 ,7 34 4 78 ,7 33 5 15 ,0 50 5 14 ,0 03 5 61 ,6 84 6 04 ,8 85 6 50 ,5 72 6 89 ,6 50 7 27 ,6 44

Risk w eighted assets (Basel 3 fully loaded) 727,644

Tier one capital 15,207 17,258 14,834 16,951 24,412 32,523 35,522 39,725 46,894 56,615 60,617 66,404 73,325 80,531

Equity tier 1 c apital (Prev ailing regulatory regime) 0 0 9,450 12,520 17,218 24,970 28,293 32,191 38,968 48,366 53,205 58,844 65,538 72,510

Equity tier 1 capital (Basel 3 fully loaded) 67,053

NPL (Non Performing Loans) 4,518 3,895 3,700 3,277 4,208 4,356 4,613 6,070 13,968 24,027 27,908 31,908 35,908 38,408

Funds under management 88,648 95,247 93,338 108,903 170,859 197,518 177,828 159,986 131,061 144,313 145,547 155,431 163,863 172,774

Employees (y ear end) 129,640 115,706 104,178 103,038 128,985 125,367 129,749 131,819 170,961 169,460 178,869 180,658 183,368 187,035

YOY GROWTH (%) Dec. 00 Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11e Dec. 12e Dec. 13e

Net interest income NC 23% (8%) ( 15%) (5%) 44% 17% 23% 45% 22% 11% 4% 5% 3%

Revenues NC 17% (11%) (5%) 3% 38% 17% 20% 2 7% 1 5% 7% 3% 5% 3%

Costs NC 16% (12%) (12%) 2% 38% 8% 9% 25% 7% 11% 2% 3% 3%

Operating profit bef prov. NC 19% (10%) 5% 5% 39% 28% 31% 28% 21% 4% 4% 6% 3%

Adjusted net attributable profit NC 23% (3%) 9% 29% 69% 27% 23% 4% 4% (9%) 10% 20% 6%

Customer Loans NC 3% (6%) 6% 101% 16% 20% 10% 16% 8% 8% 7% 5% 4%

Customer Deposits NC (2%) (9%) 2% 98% 11% 8% 1% 28% 20% 19% 15% 7% 5%

RWA (***) NC 3% (9%) 1 1% 6 6% 21% 16% 8% (0%) 9% 8% 8% 6% 6%

FINANCIAL RATIOS (%) Dec. 00 Dec. 01 Dec. 02 Dec. 03 Dec. 04 Dec. 05 Dec. 06 Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11e Dec. 12e Dec. 13e

Net interest margin (avg. tang. assets) 2.85% 2.70% 2.29% 1.45% 1.44% 1.50% 1.74% 2.24% 2.49% 2.57% 2.49% 2.51% 2.51%

Cost / Income ratio 60.4% 59.8% 59.1% 54.7% 54.1% 53.9% 49.7% 45.2% 44.6% 41.7% 43.3% 42.8% 42.0% 41.8%

Costs / avg. tang. Assets NC 2.82% 2.56% 2.26% 1.53% 1.45% 1.40% 1.43% 1.59% 1.56% 1.60% 1.53% 1.50% 1.49%

Bad debt charge / average outstanding loans 1.24% 0.92% 0.98% 0.89% 0.61% 0.43% 0.56% 0.68% 1.16% 1.48% 1.49% 1.38% 1.16% 1.11%

Bad debt charge / RWA (***) 0.79% 0.85% 0.77% 0.58% 0.43% 0.55% 0.70% 1.29% 1.76% 1.76% 1.63% 1.35% 1.28%

Tax rate 21.5% 24.4% 23.3% 23.0% 11.6% 16.4% 19.6% 20.0% 20.7% 19.8% 24.3% 24.0% 24.0% 24.0%

ROE adjusted NC NC 19.1% 10.3% 11.9% 16.3% 17.5% 18.5% 16.7% 15.5% 12.5% 12.3% 13.7% 13.3%

ROTE adjusted 26.3% 19.7% 17.5% 20.0% 28.6% 28.5% 26.5% 24.2% 23.7% 19.1% 19.0% 20.4% 19.2%

RORWA adjusted (***) 1.17% 1.17% 1.28% 1.18% 1.45% 1.56% 1.72% 1.73% 1.72% 1.44% 1.47% 1.65% 1.65%

ROTA 0.69% 0.69% 0.76% 0.65% 0.76% 0.86% 1.00% 0.92% 0.88% 0.74% 0.76% 0.87% 0.89%

Tier one Ratio 7.6% 8.4% 8.0% 8.3% 7.2% 7.9% 7.4% 7.7% 9.1% 10.1% 10.0% 10.2% 10.6% 11.1%

Equity tier 1 ratio (Prevailing regulatory regime) 5.1% 6.1% 5.1% 6.1% 5.9% 6.3% 7.6% 8.6% 8.8% 9.0% 9.5% 10.0%

Equity tier 1 ratio (Basel 3 fully loaded) 9.2%

Loans / Deposits 116% 122% 125% 130% 132% 138% 154% 168% 152% 136% 123% 115% 112% 111%

RWA (***) / Loans 118% 118% 114% 119% 98% 102% 99% 96% 83% 85% 85% 85% 86% 87%

Loans / Assets 49% 49% 50% 49% 52% 50% 58% 58% 59% 60% 59% 60% 60% 61%

Deposits / Assets 42% 40% 40% 38% 40% 36% 38% 35% 39% 44% 48% 52% 54% 55%NPL / Outstanding loans (Gross) 2.59% 2.18% 2.20% 1.84% 1.19% 1.06% 0.94% 1.12% 2.22% 3.52% 3.80% 4.06% 4.35% 4.46%

NPL coverage Ratio 108% 130% 133% 156% 163% 175% 177% 143% 89% 74% 71% 69% 67% 68%

Latest Model update : 29 Jul. 05 (*) In listing currency, w ith div. reinvested, (**) also adjusted for am. of intangibles from M&A, or for am. of gw ill for pre IFRS years, (***) Based on stated RWA

Reuters / Bloomberg: SAN.MC / SAN SM

SANTANDER (Outperform)

Price 1.4*Book Val. Relative to DJ STOXX503.8

14.0

5.0

7.0

9.0

11.0 Target Price


14/27

60 Spanish banks

BBVABanks Spain

Neutral

Target price EUR10 (+13%)


Neutral on BBVAs sharesPrice (14 March 2011) EUR8.8Market cap./Free float (EURbn) 41.9/39.83m avg. volume (EURm) 390.6Reuters/Bloomberg BBVA.MC/BBVA SM



Net att. profit rep. (EURm) 4,606 4,769 5,443 5,920Net att. profit adj. (EURm) 4,550 4,705 5,372 5,847Tangible BV (EUR) 27,912 31,341 35,255 39,511ROTE adj. (%) 18.2 15.9 16.1 15.6Equity Tier 1 Ratio (%) 9.6 10.1 10.7 11.6





Absolute 5 (0) 11 (10)Rel. Banks 6 5 10 (7)Rel, DJ STOXX50 8 5 13 (12)* In listing currency, with dividend reinvested


(+34)91 114 83 10

[email protected]

Emerging market bet with high profitability

We expect the company to deliver EUR16bn in profits in the 2011-

2013 period with Spain representing 25%-30% of the bottom line

(most of the earnings growth will be related to Mexico and Turkey).

Slowdown in NPL formation and comfortable liquidity

The stock of NPLs remained virtually unchanged during 2010 and

average medium and long term wholesale maturities of 2.0% of

the liability base p.a. in the 2011-2015 seem manageable.

Capital accumulation

We believe the bank might be able to accumulate 66bp of corecapital p.a. over the next three years for a core capital ratio

approaching 11% by 2013 after Basle 3 has been considered

The story has some negatives, however

The bank faces declining marginal returns as we believe the

unusually high returns on tangible equity are unlikely to be

replicated in the short to medium term given the enlarged capital

base. We are also concerned about the medium term strategy of

the company given that, in our opinion, some of the major strategic

decisions might be questioned and some of the large deals the

company has executed have not created value for shareholders.


0

5

10

15

20


Relative to DJ STOXX50 BBVA


15/27

62 Spanish banks


EUR8.8 / EUR10 +13%Analyst: Santiago Lp ez Daz (+34)91 114 83 10 Banks (Neutral) - Spa in



Free f loat 39,755



Absolute (0%) 11% (10%)

Rel. Sector 5% 10% (7%)Re l. DJ STOXX5 0 5 % 1 3% ( 12 %)

12m Hi/Lo (EUR) : 10.9 -19 % / 6 .9 +2 7%

CAGR 2000/2011 2011/2013


Book value 6% 8%





Reported EPS 0.7 0.7 0.5 0.7 0.9 1.1 1.4 1.7 1.3 1.1 1.1 1.0 1.1 1.2

Adjusted EPS 0.6 0.7 0.6 0.7 0.8 1.1 1.3 1.6 1.2 1.1 1.1 1.0 1.1 1.2

% change 0.0% 15.6% (16.1%) 8.7% 25.0% 33.3% 15.4% 23.6% (21.1%) (7.4%) (2.6%) (10.8%) 12.6% 7.2%

Book value (BVPS) 4.2 4.2 3.9 3.9 3.9 4.8 6.1 7.2 6.8 7.4 7.7 8.3 9.0 9.7

Tangible BVPS 2.9 2.7 2.5 2.7 3.6 4.2 5.1 5.0 4.6 5.6 6.0 6.6 7.3 8.1

Net dividend 0.4 0.4 0.4 0.4 0.4 0.5 0.6 0.7 0.6 0.4 0.4 0.4 0.5 0.5


P / E adjusted 23.6 19.4 17.8 13.3 13.2 11.8 13.0 10.9 9.5 8.1 8.4 8.8 7.9 7.3


P / GOP 9.53 7.50 6.17 5.33 6.53 6.44 6.33 6.54 4.17 2.88 3.19 3.46 3.38 3.37

P / BVPS 3.57 3.38 2.80 2.27 2.82 2.69 2.72 2.37 1.71 1.26 1.22 1.06 0.98 0.91

P / Tangible BVPS 5.15 5.17 4.27 3.23 3.01 3.08 3.21 3.41 2.55 1.67 1.57 1.34 1.21 1.09

High (x) 5.83 6.07 5.39 3.86 3.48 3.47 3.64 3.84 3.47 2.27 2.12 1.43

Low (x) 4.10 3.35 2.75 2.43 2.72 2.73 2.78 2.98 1.50 0.80 1.19 1.05Net yield (%) 2.5% 2.7% 3.2% 4.4% 4.1% 4.1% 3.9% 4.3% 5.2% 4.5% 4.5% 4.8% 5.4% 5.8%

Payout (%) 59.1% 52.5% 57.6% 58.2% 53.6% 48.3% 50.4% 46.5% 49.3% 36.6% 37.6% 42.3% 42.3% 42.2%




Net fees and commissions 3,369 4,038 3,668 3,263 3,413 3,940 4,335 4,559 4,527 4,430 4,537 4,684 4,772 4,883

Trading profit 779 490 765 652 1,060 1,267 2,034 1,956 1,558 1,544 1,894 1,799 1,835 1,872

Other income 589 393 391 847 743 901 1,338 1,128 1,206 810 1,159 1,181 1,202 1,226

Total Revenues 11,732 13,745 12,274 11,039 11,121 13,024 15,701 17,271 18,977 20,666 20,910 21,189 21,859 22,355

Personnel costs (3,774) (4,243) (3,698) (3,263) (3,247) (3,602) (3,989) (4,335) (4,716) (4,651) (4,814) (4,963) (5,117) (5,329)

Other operating costs (2,340) (2,768) (2,335) (1,987) (1,834) (2,150) (2,357) (2,918) (3,040) (3,011) (3,392) (3,408) (3,424) (3,440)

Depreciation and amortisation (excl. goodw ill) (653) (742) (631) (511) (448) (449) (472) (577) (699) (697) (761) (791) (823) (856)

Total costs (6,767) (7,753) (6,664) (5,761) (5,529) (6,200) (6,818) (7,830) (8,455) (8,358) (8,967) (9,162) (9,364) (9,625)


Bad debt charge (973) (1,919) (1,743) (1,277) (958) (854) (1,504) (1,904) (2,941) (5,473) (4,718) (4,640) (4,211) (3,769)

Other provisions

Associates

Others

Profit be fore tax, gdw and e xce ptionals 3,992 4,073 3,867 4,001 4,633 5,969 7,380 7,538 7,582 6,835 7,225 7,386 8,284 8,961

Amt of goodw ill 0 0 0 0 0 - - - - - - - - -

Exceptional items (116) ( 439) ( 748) ( 189) ( 496) ( 377) ( 349) 957 (656) (1,099) ( 802) ( 762) ( 724) ( 739)

Profit be fore tax 3,876 3,634 3,119 3,812 4,137 5,592 7,030 8,495 6,926 5,736 6,423 6,624 7,560 8,222

Tax (962) (625) (653) (915) (1,029) (1,521) (2,059) (2,080) (1,541) (1,141) (1,427) (1,457) (1,663) (1,809)

Minorities (682) (646) (747) (670) (186) (264) (235) (289) (365) (385) (389) (397) (454) (493)

Net attributable profit (NAP) reported 2,232 2,363 1,719 2,227 2,923 3,806 4,736 6,126 5,020 4,210 4,606 4,769 5,443 5,920

Net attributable profit adjuste d 2,001 2,313 1,941 2,110 2,772 3,731 4,326 5,657 4,642 4,358 4,550 4,705 5,372 5,847


Customer Loans 137,467 150,220 141,315 148,827 172,083 216,850 256,565 313,178 335,260 323,442 338,857 346,341 354,791 364,714

Securities 72,624 81,816 68,901 71,881 103,319 109,426 100,985 117,519 128,115 141,028 132,460 132,133 132,605 134,787

Intangibles 4,075 4,617 4,257 3,707 821 2,070 3,269 8,244 8,440 7,248 8,007 8,007 8,007 8,007

Other assets 81,979 72,593 65,069 62,735 53,218 64,043 51,097 62,785 70,836 63,347 73,414 76,354 79,187 82,145

Total assets 296,145 3 09,246 2 79,542 2 87,150 3 29,441 3 92,389 4 11,916 5 01,726 5 42,650 5 35,065 5 52,738 5 62,835 5 74,590 5 89,653





Risk w e ig ht ed a sset s ( Pr evail in g r eg ula to ry r eg ime ) 1 69 ,5 27 1 74 ,9 27 1 63 ,1 10 1 70 ,0 24 1 81 ,1 31 2 16 ,8 90 2 52 ,3 73 2 68 ,4 91 2 83 ,3 20 2 91 ,0 26 3 13 ,3 27 3 32 ,0 73 3 50 ,5 00 3 59 ,6 89


Tier one capital 15,117 14,872 13,680 14,432 14,666 16,279 19,573 19,559 22,364 27,254 33,022 36,451 40,365 44,621

Equity tier 1 c apital (Pr ev ailing r egulato ry r egime) 11,111 10,523 9,605 10,541 10,868 12,151 1 5,548 15,54 6 17,552 23,191 30,097 33,526 37,4 40 41 ,696


NPL (Non Performing Loans) 2,799 2,675 3,473 2,673 1,819 2,346 2,491 3,358 8,358 15,136 15,249 17,749 19,749 21,249


Employees (year end) 108,082 98,588 93,093 86,197 87,112 94,681 98,553 111,913 108,972 103,721 106,976 104,836 102,740 101,712


Net interest income NC 26% (16%) (16%) (6%) 17% 16% 20% 21% 19% (4%) 2% 4% 2%

Revenues NC 17% (11%) (10%) 1% 17% 21% 10% 10% 9% 1% 1% 3% 2%

Costs NC 15% (14%) (14%) (4%) 12% 10% 15% 8% (1%) 7% 2% 2% 3%

Operating profit bef prov. NC 21% (6%) (6%) 6% 22% 30% 6% 11% 17% (3%) 1% 4% 2%

Adjusted net attributable prof it NC 16% (16%) 9% 31% 35% 16% 31% (18%) (6%) 4% 3% 14% 9%

Customer Loans NC 9% (6%) 5% 16% 26% 18% 22% 7% (4%) 5% 2% 2% 3%

Customer Deposits NC 8% (12%) (4%) 6% 22% 5% 14% 16% (0%) 9% 2% 4% 3%

RWA (***) NC 3% (7%) 4% 7% 20% 16% 6% 6% 3% 8% 6% 6% 3%







Tax rate 24.8% 17.2% 20.9% 24.0% 24.9% 27.2% 29.3% 24.5% 22.3% 19.9% 22.2% 22.0% 22.0% 22.0%

ROE adjusted 30.2% 17.4% 14.9% 16.7% 22.1% 27.2% 25.7% 26.2% 18.3% 16.2% 15.1% 13.4% 13.6% 13.5%

ROTE adjusted 25.9% 23.1% 25.1% 26.5% 28.2% 26.6% 30.5% 25.8% 22.2% 18.2% 15.9% 16.1% 15.6%

RORWA adjusted (***) 1.34% 1.15% 1.27% 1.58% 1.87% 1.84% 2.17% 1.68% 1.52% 1.51% 1.46% 1.57% 1.65%

ROTA 0.78% 0.67% 0.76% 0.91% 1.04% 1.08% 1.25% 0.90% 0.82% 0.85% 0.86% 0.96% 1.02%

Tier one Ratio 8.9% 8.5% 8.4% 8.5% 8.1% 7.5% 7.8% 7.3% 7.9% 9.4% 10.5% 11.0% 11.5% 12.4%

Equity tier 1 ratio (Prevailing regulatory regime) 6.6% 6.0% 5.9% 6.2% 6.0% 5.6% 6.2% 5.8% 6.2% 8.0% 9.6% 10.1% 10.7% 11.6%


Loans / Deposits 89% 90% 96% 106% 115% 119% 133% 143% 131% 127% 123% 123% 121% 121%

RWA (***) / Loans 123% 1 16% 1 15% 1 14% 1 05% 1 00% 98% 86% 85% 90% 92% 96% 99% 99%

Loans / Assets 46% 49% 51% 52% 52% 55% 62% 62% 62% 60% 61% 62% 62% 62%



Latest Model update : 14 Mar. 11 (*) In listing currency , w ith div. reinvested, (**) also adjusted for am. of intangibles from M&A, or for am. of gw ill for pre IFRS years, (***) Based on stated RWA

Reuters / Bloomb erg: BBVA.MC / BBVA SM

BBVA (Neutral)


20.0

6.0

10.0

14.0

Target Price


16/27

63 Spanish banks

PopularBanks Spain

Underperform

Target price EUR4.00 (-8%)


Better solvency but limited profitabilityPrice (14 March 2011) EUR4.33Market cap./Free float (EURbn) 6.8/4.33m avg. volume (EURm) 40.1Reuters/Bloomberg POP.MC/POP SM



Net att. profit rep. (EURm) 590.2 538.5 641.7 737.7Net att. profit adj. (EURm) 554 522 625 721Tangible BV (EUR) 7,514 7,744 8,019 8,337ROTE adj. (%) 7.2 6.8 7.9 8.8Equity Tier 1 Ratio (%) 9.4 9.5 9.5 9.5





Absolute 5 1 5 (18)Rel. Banks 5 7 4 (15)Rel, DJ STOXX50 8 7 6 (20)* In listing currency, with dividend reinvested


(+34)91 114 83 10

[email protected]

Improvement in solvency

After a series of capital increases the bank has been able to

improve its core capital ratio to 9.4% at the end of Dec 2010,

which, coupled with internal capital generation should be enough

to deal with an expected 19bp impact related to Basle 3 by 2013.

but at the expense of profitability

We expect the company to deliver an average ROTE of approx.

8% over the next three years, below the companys cost of capital.

Uncertain environment

The bank might continue to deliver as efficiently as any bank in thecountry but marginal improvements would be difficult to achieve

going forward. POP solvency and liquidity position seem

manageable but we expect provisions to remain relatively high to

deal with losses in the credit portfolio once generic provisions are

consumed. In our view, profitability is unlikely to return to the pre

crisis levels any time soon and a rising interest rate environment

might continue to negatively affect results through credit losses

and low volume growth.Price relative to DJ STOXX50

2

4

6

8

10

12

14

16


Relative to DJ STOXX50 Popular


17/27

65 Spanish banks


EUR4.33 / EUR4.00 -8%Analyst: Santiago Lp ez Daz (+34)91 114 83 10 Banks (Neutral) - Spa in



Free f loat 4,307



Absolute 1% 5% (18%)

Rel. Sector 7% 4% (15%)Rel. DJ STOXX50 7% 6% (20% )

12m Hi/Lo (EUR) : 6.0 -28% / 3 .54 +22%

CAGR 2001/2011 2011/2013

EPS res tated (**) (4% ) 17%

Book value 10% 4%





Reported EPS 0.5 0.5 0.6 0.6 0.6 0.7 0.8 1.0 0.9 0.6 0.4 0.3 0.4 0.5

Adjusted EPS 0.5 0.5 0.6 0.6 0.6 0.7 0.8 1.0 0.8 0.6 0.4 0.3 0.4 0.5

% change 0.0% 15.5% 10.6% 9.2% (10.1%) 27.8% 15.2% 22.9% (18.4%) (31.5%) (32.3%) (14.9%) 19.7% 15.3%

Book value (BVPS) 1.9 2.1 2.1 2.9 3.3 4.1 4.6 5.1 5.5 5.9 5.2 5.3 5.5 5.7

Tangible BVPS 1.9 2.1 2.1 2.6 3.0 3.8 4.3 4.7 5.0 5.5 4.8 4.9 5.1 5.3

Net dividend 0.2 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.5 0.4 0.3 0.2 0.3 0.3


P / E adjusted 14.4 14.6 14.3 13.3 16.3 13.8 14.3 13.3 10.4 10.2 12.3 13.0 10.9 9.5


P / GOP 7.00 7.18 6.89 6.26 6.76 6.97 7.25 7.41 4.56 2.71 3.18 3.59 3.58 3.48

P / BVPS 3.45 3.60 3.97 2.92 2.81 2.44 2.63 2.67 1.60 1.00 0.93 0.81 0.78 0.75

P / Tangible BVPS 3.46 3.65 3.98 3.26 3.10 2.63 2.82 2.91 1.75 1.06 1.01 0.88 0.85 0.82

High (x) 4.12 4.02 4.56 3.68 3.33 2.79 3.24 3.41 2.42 1.38 1.26 0.94

Low (x) 2.85 3.07 3.44 2.84 2.87 2.49 2.36 2.43 1.11 0.60 0.80 0.72Net yield (%) 3.6% 3.5% 3.6% 3.8% 3.5% 3.6% 3.1% 3.2% 5.7% 6.8% 6.4% 5.0% 5.9% 6.8%

Payout (%) 52.6% 51.8% 51.6% 50.7% 57.7% 48.9% 44.8% 42.1% 59.5% 69.7% 79.2% 64.9% 64.6% 64.4%




Net fees and commissions 537 567 573 608 660 790 881 883 865 763 747 726 722 734

Trading profit 119 45 29 32 66 58 111 124 129 405 199 189 180 183

Other income 14 15 36 43 34 46 85 112 1 28 64 64 67 70 72

Total Revenues 1,790 2,019 2,198 2,451 2,522 2,764 3,107 3,403 3,657 4,054 3,462 3,245 3,275 3,358

Personnel costs (477) (539) (552) (597) (639) (665) (706) (756) (818) (792) (784) (807) (815) (823)

Other operating costs (228) (250) (265) (280) (226) (274) (282) (303) (398) (396) (433) (441) (454) (477)


Total costs (773) (857) (885) (953) (959) ( 1,038) ( 1,091) ( 1,159) ( 1,317) ( 1,293) ( 1,313) ( 1,347) ( 1,369) ( 1,402)


Bad debt charge (102) (191) (244) (316) (533) (349) (349) (342) (1,112) (2,147) (1,834) (1,388) (1,258) (1,181)

Other provisions

Associates

Others

Profit be fore tax, gdw and e xce ptionals 915 971 1,069 1,182 1,030 1,377 1,668 1,903 1,228 615 315 510 647 775

Amt of goodw ill 0 0 0 0 0 - - - - - - - - -

Exceptional items (104) (119) (13) 23 16 38 56 40 273 458 518 233 238 242

Profit be fore tax 811 852 1,055 1,205 1,046 1,415 1,723 1,943 1,501 1,073 833 743 885 1,018

Tax (283) (238) (368) (427) (347) (477) (632) (607) (390) (293) (228) (193) (230) (265)

Minorities (37) (49) (54) (64) (48) (60) (65) (76) (59) (14) (14) (11) (13) (15)

Net attributable profit (NAP) reported 491 565 633 714 651 878 1,026 1,260 1,052 766 590 538 642 738

Net attributable profit adjuste d 494 570 631 705 649 875 1,021 1,254 1,021 732 554 522 625 721


Customer Loans 22,963 27,368 33,711 43,467 53,426 65,011 75,898 86,643 91,523 94,956 96,032 96,380 97,528 99,257

Securities 895 1,119 673 584 1,938 2,587 3,686 5,886 5,466 15,067 18,266 19,153 19,897 20,489

Intangibles 6 34 7 342 356 363 369 525 547 487 657 670 684 697

Other assets 7,492 8,871 7,604 8,146 7,857 9,737 11,697 14,115 12,840 18,779 15,184 15,356 15,537 15,725

Total assets 31,356 37,392 41,996 52,539 63,576 77,698 91,650 107,169 110,376 129,290 130,140 131,559 133,646 136,169





Ris k w eighted as sets ( Prev ailing r egulatory regime) 24,545 29,747 36,370 45,276 57,951 70,392 8 3,033 88,87 7 92,129 92,574 93,747 96,038 98,8 98 102,127


Tier one capital 2,579 3,060 3,683 4,635 4,489 5,692 6,190 7,040 7,476 8,506 9,070 9,317 9,610 9,947

Equity tier 1 capital (Prevailing regulatory regime) 2,399 2,760 3,245 3,897 3,508 4,711 5,202 5,752 6,604 7,938 8,839 9,082 9,370 9,702


NPL (Non Performing Loans) 201 248 345 406 600 581 611 821 2,853 5,334 5,826 6,526 7,026 7,426


Employees (year end) 11,943 12,309 12,464 13,089 13,127 13,804 14,056 15,038 15,069 14,431 14,252 14,822 15,119 15,421


Net interest income NC 24% 12% 13% (0%) 6% 9% 12% 11% 11% (13%) (8%) 2% 3%

Revenues NC 13% 9% 12% 3% 10% 12% 10% 7% 1 1% (15%) (6%) 1% 3%

Costs NC 11% 3% 8% 1 % 8% 5 % 6% 14% (2%) 2 % 3% 2% 2 %

Operating profit bef prov. NC 14% 13% 14% 4% 10% 17% 11% 4% 18% (22%) (12%) 0% 3%

Adjusted net attributable profit NC 15% 11% 12% (8%) 35% 17% 23% (19%) (28%) (24%) (6%) 20% 15%

Customer Loans NC 19% 23% 29% 23% 22% 17% 14% 6% 4% 1% 0% 1% 2%

Customer Deposits NC 11% 5% 5% 26% 11% 6% 15% 21% 15% 33% (12%) 3% 3%

RWA (***) NC 21% 2 2% 2 4% 2 8% 2 1% 1 8% 7% 4% 0% 1% 2% 3% 3%







Tax rate 34.9% 27.9% 34.8% 35.5% 33.2% 33.7% 36.7% 31.3% 26.0% 27.3% 27.4% 26.0% 26.0% 26.0%

ROE adjusted 47.8% 26.8% 28.1% 27.8% 20.6% 22.1% 21.1% 22.4% 16.5% 10.4% 7.0% 6.3% 7.4% 8.3%

ROTE adjusted 26.3% 27.7% 27.1% 20.4% 21.7% 20.8% 23.0% 17.1% 10.4% 7.2% 6.8% 7.9% 8.8%

RORWA adjusted (***) 2.10% 1.91% 1.73% 1.26% 1.36% 1.33% 1.46% 1.13% 0.79% 0.59% 0.55% 0.64% 0.72%

ROTA 1.66% 1.59% 1.50% 1.12% 1.24% 1.21% 1.27% 0.94% 0.61% 0.43% 0.40% 0.47% 0.54%

Tier one Ratio 10.5% 10.3% 10.1% 10.2% 7.7% 8.1% 7.5% 7.9% 8.1% 9.2% 9.7% 9.7% 9.7% 9.7%

Equity tier 1 ratio (Prevailing regulatory regime) 9.8% 9.3% 8.9% 8.6% 6.1% 6.7% 6.3% 6.5% 7.2% 8.6% 9.4% 9.5% 9.5% 9.5%


Loans / Deposits 112% 121% 142% 175% 171% 187% 205% 203% 177% 159% 121% 138% 136% 134%

RWA (***) / Loans 107% 109% 108% 104% 108% 108% 109% 103% 101% 97% 98% 100% 101% 103%

Loans / Assets 73% 73% 80% 83% 84% 84% 83% 81% 83% 73% 74% 73% 73% 73%



Latest Model update : 14 Mar. 11 (*) In listing currency , w ith div. reinvested, (**) also adjusted for am. of intangibles from M&A, or for am. of gw ill for pre IFRS years, (***) Based on stated RWA

Reuters / Bloomberg: POP.MC / POP SM

POPULAR (Underperform)


20.0

4.0

8.0

12.0

16.0

Target Price


18/27

66 Spanish banks

Banco SabadellBanks Spain

Underperform

Target price EUR2.60 (-17%)


GUI integration during 2011Price (14 March 2011) EUR3.15Market cap./Free float (EURbn) 5.0/4.03m avg. volume (EURm) 28.4Reuters/Bloomberg SABE.MC/SAB SM








Absolute 4 3 0 (23)Rel. Banks 5 9 (1) (20)Rel, DJ STOXX50 7 10 2 (25)* In listing currency, with dividend reinvested


(+34)91 114 83 10

[email protected]

Pending integration of Banco Guipuzcoano

Banco Sabadell needs to fully integrate the recently acquired

Banco Guipuzcoano during 2010, which is likely to significantly

affect the EPS evolution going forward given the capital increase

to finance the acquisition. We expect a 29% decline in EPS on a

fully diluted basis in 2011.

New CREA plan

The company recently presented its 2011-2103 strategic plan

CREA with the aim to leverage its existing franchise and target

new clients within its current footprint. The company aims to gain

market share and attract 1m new clients, growing market share bymore than one percentage point.

Results under pressure

SAB has successfully integrated several franchises over the past

few years but critical mass has been reached in some cases at the

expense of shareholder value creation. An economic environment

with low volume growth, margin pressure and relatively high

provisions (due to the consumption of generics) is likely to add

pressure to the structural generation of results. For 2011 we

expect a more than 70% reduction in SABs fully diluted EPS

compared with the 2006 numbers. We also expect ROTE of just

8.0% (below the cost of capital) for the next three years.


2

4

6

8

10


Relative to DJ STOXX50 Banco Sabadell


19/27


20/27

69 Spanish banks

BanestoBanks Spain

Underperform

Target price EUR6.8 (0%)


Pressure on earningsPrice (14 March 2011) EUR6.8Market cap./Free float (EURbn) 4.6/0.53m avg. volume (EURm) 3.3Reuters/Bloomberg BTO.MC/BTO SM








Absolute 11 10 6 (8)Rel. Banks 11 17 5 (4)Rel, DJ STOXX50 14 17 7 (10)* In listing currency, with dividend reinvested


(+34)91 114 83 10

[email protected]

Structural decline in profitability

Banesto is running out of generic provisions. Once they are

consumed the company will need to deal with NPL formation

through direct charges in the P&L affecting profitability going

forward. We expect EPS to decline for the fourth consecutive year

in 2011 and the company to report a ROTE barely above 8%.

Exposure to the domestic environment

Although Banesto has been aggressively reducing its exposure to

real estate developers the company might be affected by a severe

correction in the mortgage market. Negative loan growth, relatively

high provisions, margin pressure and a tough macro environmentare likely to add pressure to the companys flexibility to accumulate

capital.

Capital and liquidity

Banesto closed 2010 with an 8.3% core Tier 1 capital ratio. Capital

accumulation going forward, which we estimate at 90bp over the

next three years should help to mitigate the expected impact of

Basle 3 (around 80bp) but the company might need to generate

extra capital gains to maintain its solvency (the only company that

has not raised capital in recent times).


0

5

10

15

20


Relative to DJ STOXX50 Banesto


21/27

71 Spanish banks


EUR6.8 / EUR6.8 0%Analyst: Santiago Lp ez Daz (+34)91 114 83 10 Banks (Neutral) - Spa in



Free f loat 465

3m average volume 3


Absolute 10% 6% (8%)

Rel. Sector 17% 5% (4%)Re l. DJ STOXX5 0 1 7% 7% ( 10 %)

12m Hi/Lo (EUR) : 8.5 -21% / 5 .7 +1 9%

CAGR 2001/2011 2011/2013


Book value 8% 6%



No of shares year end, basic, (m) 677.67 677.67 684.33 694.23 694.33 694.33 694.33 694.30 687.39 687.39 687.39 687.39 687.39 687.39

No o f s hares (av g) , diluted, r es ta ted f or treas ur y s toc k 677.6 7 677.67 681.00 689.2 8 694 .28 694.33 694.33 694.32 69 0.84 687.39 687.39 68 7.39 687.39 687.39

Reported EPS 0.6 0.6 0.6 0.6 0.7 0.8 2.1 1.1 1.1 0.8 0.7 0.7 0.8 1.0

Adjusted EPS 0.5 0.6 0.6 0.7 0.7 0.8 2.6 1.2 1.0 0.8 0.7 0.7 0.8 1.0

% change NS 22.1% 1.0% 0.9% 3.4% 25.3% 213.0% (56.4%) (9.9%) (23.1%) (16.9%) (0.8%) 24.0% 22.5%

Book value (BVPS) 3.5 3.8 4.2 4.6 4.9 5.0 6.2 6.7 7.4 7.9 7.9 8.2 8.7 9.3

Tangible BVPS 3.5 3.7 4.1 4.5 4.8 4.9 6.1 6.6 7.4 7.8 7.8 8.1 8.6 9.2

Net dividend 0.1 0.1 0.3 0.3 0.3 0.3 0.4 0.6 0.6 0.5 0.3 0.3 0.4 0.5


P / E adjusted 24.7 18.0 17.2 10.7 13.5 13.3 5.3 14.0 9.9 9.9 11.0 10.3 8.3 6.8


P / GOP 15.17 12.21 11.10 6.10 7.30 7.73 8.40 8.51 5.03 3.47 3.36 3.39 3.32 3.23

P / BVPS 3.66 3.02 2.62 1.52 1.88 2.23 2.27 2.42 1.39 1.00 0.93 0.82 0.77 0.72

P / Tangible BVPS 3.70 3.09 2.69 1.55 1.91 2.29 2.30 2.45 1.40 1.01 0.94 0.83 0.78 0.73

High (x) 4.03 3.43 3.02 1.94 2.09 2.50 2.73 2.90 1.79 1.22 1.18 0.83

Low (x) 3.35 2.93 1.57 1.20 1.76 2.06 1.97 1.91 1.08 0.64 0.76 0.70Net yield (%) 0.8% 1.0% 2.2% 3.7% 3.2% 2.8% 2.6% 3.5% 5.4% 5.8% 4.6% 4.9% 6.1% 7.5%

Payout (%) 19.1% 18.8% 38.7% 39.9% 43.0% 37.9% 14.0% 48.5% 53.8% 57.5% 50.4% 50.4% 50.4% 50.3%



Net interest income 886 970 988 1,046 1,007 1,109 1,235 1,461 1,578 1,731 1,660 1,532 1,539 1,573

Net fees and commissions 419 420 432 462 488 514 546 574 619 608 617 610 629 643

Trading profit 30 41 47 56 88 105 125 138 151 157 151 149 151 152

Other income 92 66 62 80 46 60 77 98 96 67 61 62 63 64

Total Revenues 1,426 1,496 1,529 1,644 1,630 1,789 1,983 2,271 2,445 2,562 2,490 2,353 2,382 2,433

Personnel costs (558) (549) (543) (544) (563) (583) (609) (638) (655) (652) (633) (622) (616) (616)

Other operating costs (208) (224) (210) (216) (110) (102) (106) (216) (274) (243) (252) (256) (259) (270)


Total costs (849) (858) (847) (855) (761) (778) (814) (951) (1,029) (998) (988) (982) (981) (992)

Ope rating profit be fore provisions 578 639 683 789 869 1,011 1,169 1,320 1,416 1,564 1,502 1,371 1,401 1,440

Bad debt charge (101) (147) (118) (171) (163) (151) (190) (229) (337) (646) (741) (696) (590) (448)

Other provisions

Associates

Others

Profit be fore tax, gdw and e xce ptionals 476 492 564 618 706 860 979 1,091 1,079 918 761 675 811 992

Amt of goodw ill 0 0 0 0 0 - - - - - - - - -

Exceptional items (53) 29 11 22 (16) (10) 948 9 (40) (25) (3) (3) (3) (3)

Profit be fore tax 423 521 575 640 689 850 1,927 1,100 1,039 893 757 672 808 989

Tax (33) (90) (131) (191) (231) (280) (476) (336) (306) (334) (298) (215) (242) (297)

Minorities (11) ( 9) ( 8) ( 7) (0) ( 0) ( 0) 0 ( 0) 0 0 0 0 0

Net attributable profit (NAP) reported 380 422 436 442 458 570 1,451 765 733 560 460 457 566 693

Net attributable profit

resumen_spanish_banks

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