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  • 8/2/2019 Spain 2012 in Pictures

    1/41www.morganmarkets.

    Europe Equity Research12 January 2012

    Spain in PicturesA monthly view of Spanish economic indicators

    European Banks

    Jaime BecerrilAC

    (44-20) 7742-6449

    jaime.becerril@jpmorgan.com

    Axel J Finsterbusch

    (44-20) 7325 9021

    axel.j.finsterbusch@jpmorgan.com

    J.P. Morgan Securities Ltd.

    See page 39 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware ththe firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a singfactor in making their investment decision.

    The end of 2011 was mixed for Spain, with bond yields falling and the

    newly elected government announcing austerity measures which could

    already reach 40bn (4% of GDP), while more growth initiatives will

    be necessary to avoid a deep recession. This month, unfortunately,

    challenges for the economy once again outweigh the positive signs we

    could find in the period.

    We remain cautious on Spanish banks, where lack of access to wholesalemarkets, deleveraging and a recessionary environment are likely to weighfor some time. A clean-up of real estate assets should be the main priorityfor the new government in our view, potentially very positive for theeconomy as credit markets would have a chance of reopening. In the

    meantime, Santander, BBVA and Caixabank should continue to benefitfrom their relatively stronger balance sheets and access to funding.

    The positive signs this month:

    Government bond yields dropped substantially since November (p.8,11)

    ECB intervention should reduce refinancing risks in 2012 (p.9)

    Deposit wars have shifted to other products (p.5-7)

    Low interest rates are giving consumers some relief(p.21)

    Tourism is still in a recovery trend, especially from Germany (p.34)

    The negative signs this month:

    Economic indicators show recession is almost inevitable in 2012 (p.3-19) Austerity measures will increase the pressure on a weak economy (p.4)

    Spanish 2011 budget deficit could miss the 6% target by over 2% (p.13)

    Retail sales are showing renewed weakness (p. 20-22)

    There are still no signs of recovery in the housing market (p. 24-25)

    Unemployment close to 23% is still our main concern (p. 26-29)

    Recession seems inevitable for Spain in 1Q 2012 as most economic indicators suggest

    Source: Bank of Spain, Markit (Latest=December 2011)

    25

    30

    35

    4045

    50

    55

    60

    65

    70

    -6

    -4

    -20

    2

    4

    6

    8

    99 00 01 02 03 04 05 06 07 08 09 10 11

    Spanish PMI Composive vs GDP YoY %

    GDP YoY (%) LHS PMI Manufacturing RHS PMI=50

    ECBs December LTRO was a large on

    Source: Companies, J.P. Morgan estimates

    Austerity measures are growing again

    Source: Spanish Government

    20

    15

    11 11

    8

    54

    0

    5

    10

    15

    20

    25 LTRO Borrowing bn

    24%28%

    37%43% 44% 45% 4

    0.75%

    2%

    3%

    4%5%

    6% 7

    24.75%

    30%

    40%

    47%49%

    51% 5

    0%

    10%

    20%

    30%

    40%

    50%

    60%

    - 17,707 33,007 53,407 120,000 175,000 300

    Starting Tax Base

    Spanish Income Tax (%)

    Withholding Additional

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    Europe Equity Research

    12 January 2012Jaime Becerril(44-20) 7742-6449jaime.becerril@jpmorgan.com

    Table of Contents

    Spanish government expects recession in 2012 ............ ............. ............. ............3Austerity measures will increase pressure on weak growth ............. .............. .....4

    Deposit outflows are still small, mostly amongst weaker banks.............. ............5

    Other European countries are having issues with their deposits ............ ............6

    Competition for deposits was still strong at the end of 2011............ .............. .....7

    Wholesale funding pressures remain high for Spanish companies.....................8

    Spanish banks ECB funding is close to record high levels.......... ............. ..........9

    Government bond yields dropped but pressures remain high...........................10

    Spanish Government debt is still favoured by SMP purchases ............. ............ 11

    Spanish Regional Governments debt is still a major concern...........................12

    Spanish 2011 budget deficit could go well above its 6% target ............. ............ 13

    Rating agencies are keeping a close eye on Spain........................ ............. ........14

    Credit continues to shrink in Spain as mortgage demand tanks........................15

    Debt and leverage: Spain needs to de-lever further ............. ............. .............. ...16

    Deleveraging is already taking place, as the economy adjusts............ ............. .17

    Spanish trade balance: exports are showing some weakness...........................18

    Industrial production drop is signaling recession..... ............. .............. ............. .19

    Retail sales could pick up a bit in the sales season............. ............. .............. ...20

    Lower rates are a positive for consumption ............ ............. .............. ............. ...21

    Car sales are taking another dip as the turmoil continues........ ............. ............ 22

    Card consumption is weakening as banks fees keep growing..........................23

    Real estate prices are still far from recovery ............. ............. .............. ............. .24

    The outlook for mortgage demand is still weak......... ............. .............. ............. .25

    Spanish Unemployment: younger generation is the main concern ..... ............. .26

    Labor reforms are needed to solve the unemployment problem........................27

    Unemployment remains more problematic in the South ............. ............. ..........28

    Spain is still at the top in Europe in unemployment....................... .............. ...29

    Inflation growth is relaxing, as commodities prices drop............ ............. ..........30

    Credit quality deterioration continues ............ ............. .............. ............. ............ 31

    Credit quality indicators (continued)................. .............. ............. ............. ..........32

    Consumer confidence remains very low in Spain ............ ............. ............. ........33

    Tourism is the bright spot, benefiting from turmoil elsewhere ............ ............. .34Valuation data......................................................................................................35

    Relative evolution of Spanish vs European banks ............. ............. .............. .....36

    Timeline of next events in Spain/Europe.................. ............. ............. .............. ...37

    Recently published research...............................................................................38

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    Europe Equity Research

    12 January 2012Jaime Becerril(44-20) 7742-6449aime.becerril@jpmorgan.com

    Spanish government expects recession in 2012

    The Bank of Spain announced 4Q11 GDP could drop QoQ from being flat in 3Q11, increasing the odds of Spain entering

    recession in 2Q12 as consensus estimates (Bloomberg) dropped to 0.2% for 2012 (previously 0.6%). PMI figures released 2

    January reflected a drop in December to 43.7 vs 43.8 in November, usually a good proxy of GDP evolution.

    Household spending is still the main driver of Spanish GDP (65% of total). Comments from the newly elected governmentsuggest they could take further austerity and unpopular measures (already increased income tax substantially) likely to apply

    downward pressure to consumption, something banks and retailers are already warning.

    The new Spanish Government is yet to release its official GDP forecasts, currently standing at 0.8% in 2011, 2.3% for 2012

    and 2.4% in 2013, which the new Finance Minister already warned could be too high (right chart below).

    Spains new Finance Minister Luis de Guindos announced on 26 December that the Government expects Spain to return to

    recession in 1Q12, making official 2.3% forecasts look extremely optimistic for 20121.

    JPM downgraded Spains GDP forecast on 4 November 2011 (GDW: Euro area: fiscal slippage and an even deeper recession)

    Figure 1: The Spanish economy is weakening as reported byeconomic sentiment and PMI indicators, still well below 50

    Figure 2: Economic sentiment deteriorated again in Decemberin Spain, pointing to a negative GDP in 2011

    Figure 3: The new government is yet to publish its officialGDP forecasts 2012 and 2013. An adjustment to officialforecasts is likely

    Source: Bank of Spain, Markit (Latest=December 2011) Source: EU Commission, Bank of Spain, Bloomberg Source: Spanish Finance Ministry, Bloomberg, IMF, EU, J.P. Morgan estimates

    1

    De Guindos: Espaa volver a entrar en recesin en 2012 (Expansin, 26 December 2011)

    25

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    5055

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    -6

    -4

    -2

    0

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    99 00 01 02 03 04 05 06 07 08 09 10 11

    Spanish PMI Composive vs GDP YoY %

    GDP YoY (%) LHS PMI Manuf RHS PMI=50

    -6

    -4