Inevitable, really. Having whittled bank valuation metrics down to tangible book values, analysts are now starting to question how tangible those books might actually be.
An interesting note out of Citigroup this week focuses on the issue of deferred tax assets, which in the case of Spanish banks in particular seem to take up an unusually large footprint on the balance sheet at institutions like Santander and BBVA.
Tax assets, whether from past losses, acquisitions or whatever, clearly have a real benefit – but only in so far that you usually have to earn profits in the future to realise the off-set value.
In Britain, RBS has just managed to monetise the value of its own deferred tax assets by using them to part-pay for the government’s toxic asset insurance scheme. But elsewhere, the trend has been towards writing down the value of DTAs at the likes Fortis, which recently wrote-down €1bn of such assets.
Ronit Ghose at Citi notes that as of end-2007, Santander had €10.8bn of gross DTAs sitting on its balance sheet, equivalent to 28 per cent of its tangible common equity. Over at BBVA, meanwhile, the gross DTA/TCE ratio had risen from 28 per cent to 38 per cent by end-2008. The betting now is that Santander’s figure will have risen by a similar margin after acquisitions like Alliance & Leicester.
Does this matter? Well, Ghose does not seem so sure – simply reiterating that Citi “buy” advice on Santander and BBVA, based on a forecast that both banks will continue to be profitable through 2009/10.
But the analyst is clearly concerned about the issue, noting how high Spanish banks look when compared with just about all international peers. Only Bank of America beats them:
Related links:
Tangled tangibles – FT Alphaville
Citi of over-leveraging – FT Alphaville
Citi and some capital dilemmas – FT Alphaville