Can BBVA Be B-B-Believed?

Amidst all the talk of Europe going back to a financial Stone Age, we got to see the earnings from Spain's second largest bank, Banco Bilbao Vizcaya Argentaria (BBVA). In a way, it was something of an anticlimax - no howls of pain, no eye-popping losses, no dire projections or grim predictions of failure. It was an okay report ... maybe almost too okay?

Gross loans were down just slightly from last year, and up a little on a sequential basis. Spain's unemployment is 19%, Portugal's is about 9% (though I've seen a wide range on this stat), and Mexico's is officially about 5 or 6% (but common assumption is that the real rate is much higher). So who, exactly is BBVA lending to? I mean, I realize loans don't disappear just because the economy is bad, but it's just the first oddity that hit me.

Net interest income was up a bit from last year, and down a little on a sequential basis. Deposits were likewise mixed - up a little on a yoy basis, down a little sequentially. Okay, no big deal there. 

Here's where things get really squirrely for me. The non-performing assets ratio was flat from December, at 4.3%, and up from last year's 2.8%. Impairments were up 17% from last year to 1.1B, but down a fair bit from December. Provisioning was up about 8% sequentially (to 9.3B) and up 73% from last year's level. Surprisingly, the company has also been showing really strong recoveries as part of its non-performing assets -- recoveries of 2.4B were booked this quarter, and that was up 20% sequentially and nearly double the year-ago level.

On a net basis, then, the company added 874M euros to NPA, the lowest rate of increase in quite a while; half of December's increase, and a third of last year's. The coverage ratio has gone from 76% in March of 2009 to 59% now.

Now let's just think about this for a moment. With everything we've been seeing in Spain, Portugal, Mexico, and so on, do you really think it makes sense that coverage ratios are decreasing and net provisioning additions should be declining?

BBVA's actions seem to be suggesting that the worst is over ... but the general thought seems to be that trouble has only begun in Spain. What makes this even worse is that Spanish banks used to have a reputation for playing a little fast and loose with numbers - being slow to classify loans as non-performing, extending new loans to bad debtors to allow them to continue making payments on the prior loans, etc, etc.

Now, I happen to like BBVA to a point. I generally like the markets that the company is in, and I think there is good long-term growth potential here. But something about this earnings release just doesn't sit well with me. I hope I'm misinterpreting things or making mountains out of molehills. If I'm right, though, and my suspicions have merit, then BBVA management may be fiddling while their credit burns.

If you have a lot of confidence that Spain and Portugal will somehow walk through the minefield safely, and a faith that BBVA's management is taking a conservative approach to their credit, then this may be a great opportunity to buy while everyone else is panicking.

I, however, don't have that kind of confidence, nor that strong of a stomach. So I'll sit tight for now. I wish BBVA the best and will keep them on the watchlist, but I want to see at least a couple more quarters before I pony up my own cash for these shares.