StockSpain

Banco Popular has released its results for the 4th quarter and consolidated 2009. In general, the results were slightly above consensus estimates of analysts at the level of net profit (+11%). Maintains a significant growth in net interest income, which can maintain a double-digit growth in the year in which the accumulated slowdown 4T09.

The bank president said during the presentation of the results that the slowness of the Bank of peak “in the second or third quarter” of 2010. But until then, will be “increasing” and “close” to the maximum. In this regard, he noted that the recoveries of bad debts “were over,” adding that the bank has 600 people! working in the fight against default. Banco Popular in front of the financial year 2010 with great care and can not believe that there will be “no surprises”.

If so, it is clear that the results of the first half of 2010 will not be encouraging that the unemployment rate in Spain will increase and that our differential with Europe will be extended (and worse).

Highlights of lines:

• The net interest margin (+11%): Throughout the quarter, continues to show strength because of differences in management capacity: 5% vs. 4Q08 vs. Flat. 3T09. By 2010, it is logical to see weakness in this figure, with negative growth rates.

• EBITDA (11%). Remarks by the parties most relevant: i) Commissions, under estimation and continue to show weakness with a quarterly decline of 3%, ii) the ROF is supported in the preferred program conducted by subordinates in 4T09 (gains of € 112mn), the results Trading is distorted and compensate the behavior of the committees.

• operating profit (+18%). Drop 1% of overheads and efficiency of 29.3% (below comparable). After the purchase of minority shareholders of subsidiaries, confirms the cost-control, which has been a constant throughout the year and was eventually placed in a contraction of -2.2%.

• The costs of administration, Evolution Flat 6% decrease in office and the cost of renting has increased by 25%. Must be the only ones to pay more rent for Inditex, Banesto and the chain Vips are revising downward rents drastically.

• Personnel costs (-3%), with a 4% decline in the number of employees!.

• Asset quality: uncertain balance amounted to 5.512m (vs 273m increase per quarter. Delinquency 4.8% and the coverage of 50%. Details of these very weak

• Value of capital: it maintains the leading position in the Core Capital (8.6%). Solid
In terms of valuation, the deal is quoted at 0.9 x P / BV 2010. The PER’10 negative 15x to 9x against Santander and BBVA. Foreign analysts, as Citi has set a target price to 5.5 € currently trading above € 6 (with the falls are now almost comes close to 5.5 €). They must really fear the Spanish economy.

If you are pondering in which stock market you should invest, the following table could be a good hint. Courtesy of The Economist, it lists the countries with highest and lowest forecasted GDP growth.

Seeing Qatar and a number of let’s say “unorthodox” countries like Uzbekistan, Congo, Ethiopia and Angola at the very top, it is clealry a strategy only suitable for the bravest.

Revenues jumped +16.8% to €235.6m, bolstered by the strength of the Bioscience division.
Bioscience keeps bearing the group’s growth in absolute terms, with sales growing +15.0% YoY to €175.3m. Growth was based on volume, and, according to the company, prices have kept a stable trend, as expected. The amount of fractionated plasma reached new maximums, although the increase came at a lower pace than in previous quarters, as GRF is trying to apply a policy of plasma collection control, in order to adapt it to the sales forecasts and therefore to optimize its costs and inventories. Growth rates of this area will progressively accelerate throughout the year with the entrance of new contracts, as the one achieved in Brazil for €41m, which will come into effect in 2Q09.

Solid performance from the rest of the units.
Group revenues were slightly above our estimates, and this was mainly due to the outperformance of the Diagnostic unit. This area grew +27.2% YoY, based on the sales of reagents in Mexico and China; in organic terms, excluding the contribution of the new acquisition (€1.2m), growth would have been +21.3%. The Hospital unit rose +4.1% YoY, while Raw Materials & Others jumped +58.8% YoY, although this performance cannot be extrapolated to the rest of the year, as it is based on the specific needs and leftovers from the production process.

The company achieved growth in all the markets in which it is present.
Sales increased in all the markets, especially in Asia (+79.0%), United States (+27.5%) and Latam (+25.2%); revenues in Europe grew just +2.0%. This is in line with the company strategy of consolidating its presence in the US, the most attractive market in the world, while achieving a geographical diversification and facing the growing demand in plasma derivatives, especially in emerging markets, with the increase in production.

GRF was able to combine this top-line growth with a margin increase.
In spite of the appreciation of the USD, GRF was able to expand its EBITDA margin by more than 100 bps to 30.7%; EBITDA jumped +21.6% vs. 1Q09 to €72.3m. However, due to the balancing effect caused by the lengthy production process, the magnitude of this improvement could swing widely throughout the coming quarters. Net Income rose +33.8% vs. 1Q09 to €41.6m, while net debt came to €500.7m, around 2x EBITDA.

We maintain our Overweight rating.
These results confirm, once more, a clear outlook for the sector and in particular for GRF. The company has not just been able to achieve double digit top-line growth, but also to combine it with a margin improvement. It keeps presenting an attractive combination of growth prospects that are unmatched in current markets with a sector with a high defensive component and therefore, we keep our overweight recommendation for the stock.

Catalana Occidente - Hold
Spanish Credit Insurance Aid
Current Price: €7.31
Target Price: €13.00

We expect the government to announce a support agreement for credit insurers in the coming weeks. This is good news for Catalana Occidente (GCO). Credit insurers play a key role in the Spanish economy, and their capacity to cut contracts immediately when they see a risk increase can have a strong negative effect on the economy. Press reports and companies say the government is close to completing a deal to provide support for the sector’s activities.

What could the support measures consist of? All the information provided in the press suggests a reinsurance solution whereby the Insurance Compensation Consortium (ICC) would take the role of the second reinsurer. The preliminary conditions in the agreement indicate that the ICC could take a tranche of the claims ratio (net of reinsurance) of between 85%-130% and the credit insurer will have to face those claims below and above that range. If we add the cost ratio for GCO on credit insurance (29.2% in 2008, acquisition plus administration costs), we estimate that the company would be protected in a combined ratio range of 115%-160% for 2009. The credit insurers would give the ICC a percentage of their profits (a level of around 3% has been mentioned) for the next 3-5 years, which we think is cheap compared to the losses that could arise in 2009 due to insolvencies. The final details on the agreement have not been defined yet and the government may actually approve the deal soon at one of its regular weekly cabinet meetings.

In our view, the reinsurance programme should substantially reduce the probability of GCO being forced to allocate more capital to its credit insurance lines. Note that GCO currently has a very strong capital position, with a 320% solvency ratio after goodwill (€401mn in 2008). The insolvency data in January were poor, with insolvencies/total maturities at 7.1% vs 5.4% in December 2008. The good news is that the insolvency growth rate seems to be stabilizing from very high levels: +37.3% YoY in January vs +83% YE08). We think that the reinsurance support programme could provide a floor for 2009 credit losses for insurers that should be well received by the market, so we still recommend a Hold and a €13.00/share.

Holidays and flu have kept me busy in the beginning of this year, so this is my first post in 2009. All the central themes I discussed with you all last year remain, with Global growth (or lack of it) at the forefront of our thinking. However, a couple of positives have recently surfaced albeit in a stormy environment: global PMI data has just started to rally off its lows, and the volatility on equities has fallen considerably with the VIX now around 40 and far away from the double top in the 80s of October and November of last year.

If we take a look at equities, then since October, in most cases we have seen a 20% rally in most of the indices worldwide. This is interesting as analysts tell us that the demand in bonds is due to capitulation of funds in equities over bonds. Certainly the rally in bonds looks like a bubble in the making but the balloon looks like it still has room to inflate as governments and treasuries agree that rates will remain low is essential. It is crucial for governments to install this belief, as they need to issue tons of bonds in coming months to build up an armoury for fiscal stimuli. If they don’t keep this view alive then returns of 1 or 2% will see a mass exodus and leave major governments without the funds they need. This is why the commitment to cut rates will remain strong, especially in the UK and the US.

As we see unemployment in Germany tick up for the first time since 2006, I foresee the ECB having to play catch up so expect rate cuts and possibly 75bp next week. This should see the EUR take the hit it deserves, as the ECB is way behind the curve here as inflation is NOT an issue anymore for now at least. A central bank cannot afford to wait until the data is in front of them before acting as even Trichet admits that monetary policy takes about 6 months to take hold. They are playing with fire here and basically ‘fiddling whilst Rome burns’* and we all know what happened to that empire. On the other hand, anything less than a 75bp cut next week will be met with derision, a lack of confidence and a lower EUR, so I believe the week ahead is going to be hard for the EUR no matter what. The fall to the 1.35 area on Friday suggest many agree.

Based on the interest rates convergence and Japan’s creditor nation status, the Yen is still my favourite currency, and whilst the authorities are concerned about a stronger Yen, I feel they will only be able to slow this move. I see further interest for central banks to use the JPY as part of their diversification process and although this will take some time to enact, I see investors jumping ahead and piling into JPY as the carry trade is a thing of the past and any risk appetite will not manifest itself in buying JPY crosses this year. Hence, I still bet for the EURJPY breaking all the lows towards the level of 100. I have also shorted the GBPJPY pair at the level of 140 and will do the same with the USDJPY if it rallies up to the 95.00 level.

With all that said the major concerns on the health of the economy remain, and we must not take our eye off China and Global recession issues. Add to this the big fall I expect in corporate earnings and failures, and my view is that this rally in equities could be close to an end. I still believe that this is an excellent opportunity to buy into equities, and that is what I maintained when discussing with friends and family this Christmas. However, the fact that equities are cheap today, doesn’t mean that they can’t get cheaper in a few months, so trying to play the market timing game, there are 3 main indicators I will be looking following. Two of them are the ones common to all economic cycles: interest rates ceasing to go down and a stop in the sharp increase in unemployment. The third one is directly related to the origin of this crisis, and it’s the fact that we are yet to see any signs of recovery in the US housing market.

* “Fiddling whilst Rome burns” is a phrase which means to occupy oneself with unimportant matters and neglect priorities during a crisis.

By modern-day standards Nero certainly appears a bizarre character, but that doesn’t make this story true. Roman scholars differ over interpretations of events surrounding the fire. The rivalries and conflicting accounts, even those in contemporary reports, make the ‘fiddling’ story uncertain.