Informe de Credit Suisse sobre España

1. 09 June 2008
Global
Equity Research
Macro (Strategy)
Global Equity Strategy
Research Analysts
STRATEGY
Andrew Garthwaite
44 20 7883 6477
andrew.garthwaite@credit-suisse.com Peripheral Europe: where next?
Jonathan Morton When exchange rates don’t adjust, domestic price levels have to, and this tends
1 212 538 9853 to create far more of an asset bubble (e.g. Hong Kong 1993, Middle East today)
jonathan.morton@credit-suisse.com
or deflation (Germany 1998–2003).
Luca Paolini
44 20 7883 6480
Stay short of domestic Spain and Ireland. (1) It is probable that house prices
luca.paolini@credit-suisse.com will fall c20% from here. The house price/wage ratio is 50% and 60% above
Marina Pronina
average in Spain and Ireland (compared to 3% and 35% in the US and UK),
44 20 7883 6476 respectively. The OECD claims housing is overvalued by 16% and 33% in
marina.pronina@credit-suisse.com Spain and Ireland, respectively, compared to 10% in the US. (2) Housing is still
Mark Richards
very oversupplied: starts per capita are nearly 4 times the US in both countries
44 20 7883 6484 and would have to fall 30% and 50%, respectively, to get to previous cycle lows.
mark.richards@credit-suisse.com (3) Leverage looks extreme, with credit/GDP of 40% above trend. (4) GDP
Sebastian Raedler growth is abnormally geared to property, with finance and construction at peak
44 20 7888 7554 accounting for 38% and 45% of jobs growth in Spain and Ireland, respectively.
sebastian.raedler@credit-suisse.com The PMIs are now consistent with close to zero growth. (5) There has been a
big loss of competitiveness: the Spanish current account deficit is 10% of GDP
and Ireland’s is 6%. Spain and Ireland have the lowest export exposure to
emerging markets, and Spain has the worst productivity record in the OECD.
What can be done? 80% of mortgage debt is linked to short rates, which are
now expected to rise in Europe. Thus, the only choice is significant deflation
(and yet the real effective exchange rate is 10% and 21% overvalued in Spain
and Ireland, respectively) or massive fiscal easing (with government debt/GDP
low in Spain and Ireland). In our view, both will be required, resulting in
Irish/Spanish bond spreads rising to 70bps from 20bps currently, threatening all
domestic stocks (utilities suffer from a higher discount rate).
Is it in the price? Not in Spain. Its respective P/B and P/E relatives are still
37% and 15% above the average. Domestic Spain has outperformed 1% YTD.
Domestic Spanish banks trade on a 10% premium on pre-tax, pre-provisioning
profits to continental Europe banks. Irish banks are cheap, but still trade on a
27% premium to UK banks (on underlying profits). Stocks with high exposure to
Spain or Ireland that are cheap to short and Underperform-rated are Inditex and
Bank of Ireland. The following are expensive on Credit Suisse HOLT, trades on
a premium to its peer group and has negative earnings momentum: Iberia,
Bankinter, Mapfre, Ryanair, NH Hoteles, Zardoya-Otis and Vocento.
What about elsewhere? Greece has a current account deficit of 14% and Italy
is close to recession, but we would not short banks in these countries for the
following reasons: (1) Customer leverage is low: credit/GDP is less than half the
average of Ireland and Spain. (2) Bank leverage is low, with particularly high
deposit ratios. (3) In Italy and Greece, 35% and 30% of bank lending is to
property compared with 64% and 84% in Ireland and Spain, respectively.
(4) Housing is less overvalued. (5) The cost/income ratios are higher, implying
more self-help potential. (6) Italian banks trade on a 28% discount to Europe. In
Italy, though, with debt/GDP of 96%, bond spreads could widen beyond 100bps
(from 38bps now), and thus we would sell domestic plays with negative
earnings momentum, such as Mediaset and Mediolanum.
DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON
TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER
IMPORTANT DISCLOSURES, visit www.credit-suisse.com/ researchdisclosures or call +1 (877) 291-2683. U.S.
Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors
should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision.

2. 09 June 2008
Spain and Ireland: more to go for on
the downside
Country factors should start to dominate again as the ECB starts to raise rates. In an
environment where interest rates and the exchange rate can't adjust, there is even more
onus on domestic prices and asset prices to decline in those countries which are the most
overleveraged, the most reliant on short-term debt, have the most overvalued housing
market and have the most overvalued currencies.
A year ago, we published a long report (After the boom, dated 14 May 2007) suggesting
that investors should be very short of domestic Spain and Ireland.
Clearly this has become a consensus call in the same way as shorting domestic UK had
become a consensus call by the end of last year, but this does not mean that the
consensus is wrong. Indeed, sometimes the most money is to be made on these calls.
Macro problems are getting worse: Spain and Ireland
(1) Confidence indicators are deteriorating much faster than in other European
countries.
Figure 1: Business confidence is collapsing... Figure 2: ... followed by consumer confidence
70 Spain - composite PMI 2.5 Spain Ireland Euro-area
Ireland- composite PMI
Euro-area - composite PMI 2.0
65
1.5
60 1.0
0.5
55 0.0
-0.5
50
-1.0
45 -1.5
-2.0
40 -2.5
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008
Source: PMIpremium Source: © Datastream International Limited ALL RIGHTS
RESERVED, number of standard deviations from long-run average
According to our economics team, the regional PMIs are consistent with a GDP growth
close to zero in Ireland and Spain (see Appendix 1). The rise in unemployment is even
more alarming, especially if compared to the European average. The rise in
unemployment reflects weakness in the finance/construction sector (which have
accounted for 45% and 38% of total Irish and Spanish employment growth,
respectively, in 2007), as shown below.
Global Equity Strategy 2

3. 09 June 2008
Figure 3: Unemployment rates in Spain, Ireland and EU15 Figure 4: Employment growth in Finance/Construction
12% 16% Spain Ireland
Spain Ireland EU 15
11% 14%
12%
10%
10%
9% 8%
8% 6%
7% 4%
2%
6%
0%
5% -2%
4% -4%
2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008
Source: © Datastream International Limited ALL RIGHTS RESERVED Source: © Datastream International Limited ALL RIGHTS RESERVED
(2) The slowdown in construction activity and house prices is accelerating
significantly, as shown below.
Figure 5: House prices in Spain and Ireland Figure 6: Construction activity in Spain and Ireland
Spain House prices y/y% (lhs) Spain building starts y/y% (lhs)
20 35 50 30
Ireland House prices y/y% (rhs) Ireland houses completed y/y% (rhs)
18 30 40
20
16 25 30
14 20 20 10
12 15 10 0
10 10 0
8 5 -10 -10
6 0 -20 -20
4 -5 -30
-30
2 -10 -40
0 -15 -50 -40
Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007
Source: © Datastream International Limited ALL RIGHTS RESERVED Source: © Datastream International Limited ALL RIGHTS RESERVED
These are the results of the lagged response to higher ECB rates (more than 80% of
mortgages are variable-rate) but also of the extreme overvaluation of the property markets.
Critically, the Spanish and Irish property markets remain very expensive, as shown below.
House prices relative to wages are still 50% above average in Ireland and 60% above
average in Spain. This compares to the US and UK, where the house price/wage ratios
are 3% and 35% above the average, respectively.
Global Equity Strategy 3

4. 09 June 2008
Figure 7: House prices – deviation from “fair” value (IMF) Figure 8: House prices to wage ratio still very high
5.5 Spain - House prices/wages (lhs) 9.50
5.0 Ireland- House prices/wages (rhs)
8.50
4.5
7.50
4.0
6.50
3.5
5.50
3.0
4.50
2.5
2.0 3.50
1.5 2.50
1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source: IMF. ”House prices gaps” based on affordability, disposable Source: OECD, © Datastream International Limited ALL RIGHTS
income, interest rates, credit growth, equity prices and working age RESERVED
population
And residential rental yields are low relative to bond yields, as shown below.
Figure 9: Residential yields minus bond yields in Spain and Ireland are the lowest in
Europe
500
Residential y ields minus bond y ields
400
300
200
100
0
-100
-200
Ireland
Austria
Portugal
Italy
Denmark
Netherlands
UK
Spain
France
Poland
Russia
Finland
Switzerland
Belgium
Hungary
Sweden
Germany
Norway
Source: Global Property Guide
And, looking at the level of housing starts, the correction is far from over. Our Spanish
banks analyst, Santiago Lopez Diaz, believes that a decline of up to 40% from a 2006
peak of 750k is realistic.
A good measure of oversupply is the level of housing starts/permits per capita. Again,
Ireland and Spain score at the top, with a level which is about 4 times higher than in the
US and UK, as shown below. We can also see that housing starts per capita in Spain and
Ireland are only back to levels seen 3 years ago, whereas in the US housing starts per
capita are back to levels last seen in 1991.
If housing starts per capita fell to the average level seen in US, then there would be a 60%
fall in housing permits.
Global Equity Strategy 4

5. 09 June 2008
Figure 10: Housing starts/permits per capita very high in Figure 11: Housing starts/permits per capita in Spain and
Spain and Ireland Ireland
18 25.4 Spain - Housing permits per capita (lhs) 25.00
Housing starts/permits per Capita (x1000)
16 Ireland- Housing permits per capita (rhs)
20.4 20.00
14
12
15.4 15.00
10
8 10.4 10.00
6
4 5.4 5.00
2
0.4 0.00
0
Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4
Portugal
Ireland
France
US
UK
Germany
Spain
1992 1994 1996 1998 2000 2002 2004 2006
Source: © Datastream International Limited ALL RIGHTS Source: OECD, © Datastream International Limited ALL RIGHTS
RESERVED, Global Property Guide RESERVED
We would highlight that housing starts are collapsing in Spain and Ireland, but to return to
previous cycle lows they would have to fall by an additional 30% and 50%, respectively, as
shown below.
Figure 12: Spanish housing starts, '000s annual rate Figure 13: Irish housing starts, '000s annual rate
250 80
230
70
210
60
190
170 50
150 40
130
30
110
20
90
70 10
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: © Datastream International Limited ALL RIGHTS Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse European economics team RESERVED, Credit Suisse European economics team
Of course, the Spanish and Irish economies are very sensitive to the property market.
Construction investment accounts for a disproportionately large share of Spanish and Irish
GDP, 11% and 8%, respectively (13% share of total employment).
Global Equity Strategy 5

6. 09 June 2008
Figure 14: Construction as a share of GDP and total employment (4Q 2007)
Construction as % GDP Construction employment as a % of
total employment
Ireland 8 13.2
Spain 10.9 13
Finland 5.9 7.5
Austria 7.1 na
Netherlands 5 5.8
Euro area 5.9 7.7
France 6.1 7
Portugal 5.5 na
Italy 5.6 7.7
Germany 3.5 5.4
United Kingdom 6.2 4.7
US 4.8 5.3
Source: Credit Suisse European economics team
However, they have contributed 0.8% to annual GDP growth over the past 3 years in both
Ireland and Spain. (The construction and financial sectors have accounted for 46% and
20% of total Irish and Spanish employment growth, respectively, since 2004.)
(3) Excessive leverage for Spain/Ireland, as shown in the high level of private
domestic debt relative to GDP per capita.
Figure 15: Domestic credit to GDP and GDP per capita
200%
Domestic credit to private sector /GDP(%)
Netherlands Ireland
Spain
160% Portugal
120%
Austria
Germany
Italy France
Greece
Belgium
80% Finland
40%
15000 30000 45000 60000 75000
GDP Per capita (US$)
Source: © Datastream International Limited ALL RIGHTS RESERVED
High leverage is also reflected in high interest rate payments, which therefore curb
discretionary spending.
Global Equity Strategy 6

7. 09 June 2008
Figure 16: Spanish housing interest rate payments as % Figure 17: Irish housing interest rate payments as % GDP
GDP
7.5
5.0
7.0
4.5 6.5
6.0
4.0 5.5
5.0
3.5
4.5
3.0 4.0
3.5
2.5 3.0
2.5
2.0
2.0
1.5 1.5
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: © Datastream International Limited ALL RIGHTS Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse European economics team RESERVED, Credit Suisse European economics team
An additional problem is that in Spain and Ireland a high proportion of mortgage debt is
floating, making these countries much more vulnerable to concerns that European inflation
remains above target (and that the ECB will postpone rate cuts).
Figure 18: High proportion of variable-rate mortgages in peripheral Europe
100
90
80
70
60
50
40
30
20
10
0
Netherlands
United Kingdom
Italy
Finland
Luxembourg
Ireland
Belgium
Germany
Sweden
Portugal
Denmark
Spain
Average
Austria
France
Greece
Source: OECD, European Mortgage Federation
(4) Big loss of competitiveness, as shown by the large current account deficits and
the overvalued real effective exchange rate (due to respective Spanish and Irish
domestic inflation rising, cumulatively, 11% and 12% faster than Euro-area average
since 1997).
Global Equity Strategy 7

8. 09 June 2008
Figure 19: Spain and Ireland have big current account Figure 20: ...reflecting a significant loss of
deficits... competitiveness (Real effective exchange rate)
6% Spain - current account/GDP (lhs) 8% 150%
Euro-area - current account/GDP (lhs) Spain Ireland
4% Ireland- current account/GDP(rhs) 6% Germany France
2% 140%
4%
0%
2% 130%
-2%
-4% 0%
120%
-6% -2%
-8%
-4% 110%
-10%
-12% -6%
100%
-14% -8%
Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007
90%
Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007
Source: © Datastream International Limited ALL RIGHTS RESERVED Source: OECD
This probably means that we need to see a 20% and 10% decline in the real effective
exchange rate in Ireland and Spain, respectively, just to get back to a ‘neutral’ level. We
suspect that given the problems in housing/construction, we have to see the real effective
exchange rate undershoot.
Since productivity growth is very weak (as we show below), this can only be achieved by a
sharp decline in wage costs relative to the rest of Europe, maybe by as much as 10–15%
relative to Europe in Spain and more so in Ireland.
This has to be very bad for domestic consumer-based stocks in these countries.
(5) Very low productivity growth. Spain, in particular, has experienced an almost
unprecedented decline in labour productivity in the last decade, as shown below.
(The good news is that productivity growth has been positive since 2006.)
Figure 21: Productivity growth and level very low in Spain
55 France Germany Spain
50 UK Ireland
GDP per Hour (USD PPP)
45
40
35
30
25
20
1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
Source: The Conference Board
Global Equity Strategy 8

9. 09 June 2008
(6) Low exposure to emerging markets, as shown below.
Figure 22: Ireland and Spain have relative low exposure to emerging markets
45%
Exports to developing countries, % total
40%
35%
30%
25%
20%
15%
10%
5%
0%
Ireland UK Spain European France Germany Austria Italy Greece
Union
Source: IMF
In addition, Spain is more exposed to competition from emerging markets than the
European average (35% of total imports come from emerging economies, 31% in the EU).
The positives: fiscal surplus and demographics
We, of course, acknowledge that both Ireland and Spain have the fiscal flexibility to
support their economies (both countries have budget surpluses and central government
debt/GDP ratio of 21% and 30%, respectively).
Figure 23: Fiscal debt to GDP (central government, 2007)
120
Gov ernment debt/GDP
100
80
60
40
20
0
United States
Australia
Ireland
Austria
Portugal
Denmark
Netherlands
Italy
United Kingdom
Switzerland
Canada
Spain
Finland
Poland
France
Greece
Belgium
Czech Republic
Hungary
Mexico
Sweden
Slovak Republic
Turkey
Germany
Norway
Source: OECD
But investors always underestimate the degree to which fiscal positions deteriorate into a
sharp economic downturn as tax revenues decelerate. In a normal downturn we would
expect the cycle alone to add about 2-3 pp to the fiscal deficit; for instance, in 2000–03 the
deficit rose from 0% to 3.1% of GDP in the Euro-area. (Government revenues rose 1.5%
and spending 9% in real terms.)
Global Equity Strategy 9

10. 09 June 2008
Spain has just announced a fiscal stimulus package worth €10bn over 2 years. This
€
amounts to 0.9% of GDP, including an income tax rebate of €400 for this year and next; a
€
programme to retrain unemployed construction workers; and a plan to promote more
housing subsidized by the state. However, we feel that we are likely to get very aggressive
fiscal spending.
After all, even in the good times Italy and France were running budget deficits of more
than 2% of GDP, and of course the Maastricht criteria allow countries to run budget
deficits of 3% of GDP or more in a recession. Thus, we believe that there could be
massive fiscal easing, as this is the only way to counter the deflationary threat to
these economies. If the exchange rate can’t devalue and rates can’t fall, then all the
hard work has to be done via domestic prices, wage levels and fiscal policy.
In addition, population growth has been very strong in the last decade, especially in
comparison with other European countries, and it remains so. This is, of course, an
offset for declining productivity growth.
Figure 24: Solid fiscal balance in Spain and Ireland... Figure 25: …and exceptional population growth (2007)
4.0 Spain - fiscal balance/GDP (lhs) 6.0 3.0%
Ireland- fiscal balance/GDP(rhs) 4.0 2.5%
2.0
2.0 2.0%
0.0 1.5%
0.0
-2.0 1.0%
-2.0 -4.0 0.5%
-6.0 0.0%
-4.0
-8.0 -0.5%
-10.0 -1.0%
-6.0
Brazil
US
UK
JP
Ireland
Spain
India
Euro-area
China
Russia
-12.0
-8.0 -14.0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007
Source: © Datastream International Limited ALL RIGHTS RESERVED Source: © Datastream International Limited ALL RIGHTS RESERVED
We worry that often demographic inflows are a function of opportunities as well as wage
differentials. Both clearly have diminished. Below, we show that the boost to the supply
side in Spain in terms of population growth has largely come from immigration.
Figure 26: Population growth in Spain Figure 27: Immigration has been a key driver of the
supply side stimulus in Spain
3,000 Spain Contribution of Migration toPopulationChange
3.5
2,500
3.0
2,000
2.5
1,500
2.0
1,000
(%)
1.5 500
1.0 0
0.5 -500
0.0 -1,000
-0.5
1950- 1960- 1970- 1980- 1990- 2000- 2010- 2020-
1955 1965 1975 1985 1995 2005 2015 2025
1980-1981 1987-1988 1994-1995 2001-2002 2008-2009 2015-2016
Spain World
Natural Population Change Change due to Migration
Source: OECD Source: OECD
Global Equity Strategy 10

11. 09 June 2008
Valuation not attractive
We calculate that roughly 50% of the Spanish and Irish markets are related to domestic
earnings. We show in aggregate that Spain is looking expensive on a P/E and P/B basis
relative to history, while Ireland is not.
Figure 28: Spain 12m fwd P/E relative to Europe ex-UK Figure 29: Ireland 12m fwd P/E relative to Europe ex UK
120% 110%
100%
110%
90%
100%
80%
90%
70%
80%
60%
Price to Forward earnings - Spain relative to Europe Ex UK Price to Forward earnings - Ireland relative to Europe Ex
70%
50% UK
Average Average
60% 40%
Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08
Source: I/B/E/S, MSCI, © Datastream International Limited ALL Source: I/B/E/S, MSCI, © Datastream International Limited ALL
RIGHTS RESERVED, Credit Suisse research RIGHTS RESERVED, Credit Suisse research
On a price/book basis, Spain looks even more expensive and Ireland a bit cheaper.
Figure 30: Spain price-to-book relative to Europe ex-UK Figure 31: Ireland price-to-book relative to Europe ex-UK
130% 130%
120% 120%
110%
110%
100%
100%
90%
90%
80%
80%
70%
60% Price to Book - Spain relative to Europe Ex UK 70% Price to Book - Ireland relative to Europe Ex UK
Average Average
50% 60%
Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08
Source: MSCI, © Datastream International Limited ALL RIGHTS Source: MSCI, © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research RESERVED, Credit Suisse research
It is clearly far more relevant to focus on domestic area, and here we find that domestic
Spanish stocks have slightly outperformed, while domestic Irish stocks have
underperformed the European market since January.
Global Equity Strategy 11

12. 09 June 2008
Figure 32: Domestic Spain relative to Europe and Domestic Ireland relative to Europe
1.20
1.10
1.00
Domestic Spain rel Europe
0.90 Domestic Ireland rel Europe
0.80
0.70
0.60
Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08
Source: MSCI, © Datastream International Limited ALL RIGHTS RESERVED, Credit Suisse research
Banks
We are still short of the Spanish domestic banks:
First, their performance has been surprisingly strong – though BBVA and Santander,
which have a big earnings exposure to booming Latin America (respectively 45% and 34%
of net income) have performed better than domestic banks, as shown below.
Figure 33: Spanish banks have outperformed European Figure 34: Domestic Spain banks relative price
banks performance
0.5 1.7
Spain banks vs. EMU banks (rhs)
1.6
0.5
1.5
0.4 1.4
1.3
0.4 1.2
1.1
0.4 1.0
Spanish domestic banks rel Cont
0.9 Europe banks
0.4 Spanish domestic banks rel BBVA &
0.8
SAN
0.7
0.4
Jul-98 Mar-00 Nov-01 Jul-03 Mar-05 Nov-06 Jul-08
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: © Datastream International Limited ALL RIGHTS RESERVED Source: © Datastream International Limited ALL RIGHTS
RESERVED, Credit Suisse research
Global Equity Strategy 12

13. 09 June 2008
Second, domestic Spanish banks are expensive relative to their European peers on both
P/E and P/B (they still trade at a 25% premium on forward P/E).
Figure 35: Spanish domestic banks price/book relative Figure 36: Spanish domestic bank 12m fwd P/E relative
3.20 160%
Domestic Spain banks PB rel to Europe ex UK banks Spain domestic banks 12m fwd P/E rel to Europe x UK
150% banks
2.70 Domestic Spain banks PB rel to Spain market Spain domestic banks 12m fwd P/E rel to Spain mkt
140%
2.20 130%
120%
1.70
110%
1.20 100%
90%
0.70
80%
70%
0.20
Jul-95 Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08
Jul-90 Jul-92 Jul-94 Jul-96 Jul-98 Jul-00 Jul-02 Jul-04 Jul-06 Jul-08
Source: MSCI, © Datastream International Limited ALL RIGHTS Source: I/B/E/S, MSCI, © Datastream International Limited ALL
RESERVED, Credit Suisse research RIGHTS RESERVED, Credit Suisse research
And, above all, domestic Spanish banks trade on a 10% premium to the rest of Europe on
price to pre-tax, pre-provisioning profits. Irish banks trade on a discount.
Figure 37: Domestic Spanish banks trade on price to provisioning profits
Loan-to- Leverage Price-to- Pre-prov pre- Credit Suisse
Company Country deposit (tangible) book 12m fwd PE tax PE Rating
BANKINTER, S.A. ESP 2.41 28.6 2.8 12.8 6.6 UNDERPERFORM
BANCO PASTOR, S.A. ESP 1.64 17.1 1.9 9.9 5.8 UNDERPERFORM
BANCO POPULAR ESPANOL ESP 2.29 18.7 2.3 9.3 5.5 UNDERPERFORM
BANCO SABADELL ESP 2.09 19.7 2.0 10.4 6.5 UNDERPERFORM
BANCO BILBAO VIZCAYA ARGENTARIA SA ESP 1.46 26.0 2.3 8.1 5.1 OUTPERFORM
BANCO SANTANDER SA ESP 1.90 22.9 1.7 8.6 5.6 OUTPERFORM
Spain average (median) 1.99 21.3 2.1 9.6 5.7
Spain average ex BBVA & BSCH (median) 2.19 19.2 2.1 10.2 6.2
European average (median) 1.58 25.9 1.6 8.6 5.6
Source: Credit Suisse HOLT
Both Spanish and Irish banks have very high exposure to property and construction, as
shown below.
Figure 38: Exposure of banks to property and construction, % total lending
% of bank lending to property % point
and construction increase
2000 Current
Spain 59% 84% 25%
UK 63% 73% 10%
Portugal 54% 64% 10%
Ireland 39% 64% 25%
US 43% 55% 12%
France 27% 44% 17%
Japan 33% 41% 8%
Germany 35% 37% 2%
Italy 30% 35% 5%
Greece - 30% -
Source: Credit Suisse European banks team. Credit Suisse research
Global Equity Strategy 13

14. 09 June 2008
It is only now that we are beginning to see the slowdown in loan growth and a rise in
provisioning as unemployment starts to rise. Clearly, in both economies loan growth has to
slow further and there is significant operationally leverage to this. Moreover, provisioning
has to rise a lot further. Figure 40 shows that NPLs could easily rise to 3% from 1%
currently if the unemployment rate rises by 2 pp.
Figure 39: Loan growth in Spain and Ireland (y/y%) Figure 40: Provisioning rises as unemployment rises
40% 9.0%
Spain Ireland NPLs (lhs) 21
8.0%
35% Spain umployment rate (rhs)
7.0% 19
30%
6.0% 17
25%
5.0% 15
20%
4.0%
13
15%
3.0%
10% 11
2.0%
5% 1.0% 9
0% 0.0% 7
1996 1998 2000 2002 2004 2006 2008 2Q89 4Q91 2Q94 4Q96 2Q99 4Q01 2Q04 4Q06
Source: © Datastream International Limited ALL RIGHTS RESERVED Source: Credit Suisse research
We do acknowledge that Spanish banks tended to have more conservative LTV ratios (a
capital charge is applied if LTV is higher than 80%), far less use of SIVs (owing to the
penalty imposed by the Bank of Spain) and stricter NPL standards. Also, into a default
scenario, banks can take control of all the assets of an individual (not only his property).
From this point of view, Spanish banks have potentially better recovery ratios than their
European counterparts.
Irish banks have performed worse, and look relatively cheaper against both their history
and their peer group.
Figure 41: Irish banks have underperformed in the last Figure 42: ...and they look much cheaper now
12M...
9 125%
Ireland banks vs. EMU banks (lhs) Price to forward Earnings - Ireland Banks rel. to
115% Europe xUK Banks
8
7 105%
6 95%
5 85%
4 75%
3
65%
2
55%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Jul-95 Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08
Source: © Datastream International Limited ALL RIGHTS RESERVED Source: I/B/E/S, MSCI, © Datastream International Limited ALL
RIGHTS RESERVED, Credit Suisse research
Global Equity Strategy 14

15. 09 June 2008
But when we look at pre-provisioning profits, we find that valuations are again not
particularly cheap: Irish banks trade on a 27% premium to UK banks on underlying profits
and BoI has nearly 40% of its exposure to UK commercial and residential real estate.
Figure 43: Irish banks trade on a discount to European peers on price to provisioning profits
Loan-to - Price-to- Pre-prov p re- Credit Suisse
Company Co untry deposit Leverag e book 12m fwd PE tax PE Ratin g
ANGLO IRISH BANK CORPORATION PLC IRL 1.48 24.2 2.1 5.4 4.5 NEUTRAL
ALLIED IRISH BANKS PLC IRL 1.90 19.3 1.4 6.2 4.2 UNDERPERFORM
BANK OF IRELAND IRL n/a 31.8 1.3 5.5 4.0 UNDERPERFORM
Irish average (median) 1.69 24.2 1.4 5.5 4.2
UK average (median) 1.53 36.6 1.4 5.6 3.3
European average (median) 1.58 25.9 1.6 8.6 5.6
Source: Credit Suisse HOLT
Other domestic stocks
We believe investors should be short of domestic Spain and Ireland not only because of
the growth outlook but also because a likely widening in bond spreads, as fiscal positions
deteriorate, would require a higher discount rate on all domestic stocks
We screen for stocks with more than 40% of their revenue from Spain and Ireland. Below
we show stocks with downside on HOLT and negative earnings momentum. We also
include those companies rated Underperform by Credit Suisse analysts. The stocks that
trade on a premium to their global peer group with negative earnings momentum and
expensive on HOLT are: Mapfre, Bankinter, Vocento, NH Hoteles, Iberia, Zardoya-
Otis and in Ireland, Ryanair and Irish Continental Group.
Figure 44: Domestic Spanish stocks that have downside on HOLT and negative earnings momentum OR are rated
Underperform by Credit Suisse analysts
-----P/E (12m fwd) ------ ------ P/B ------- Yield (08e) HOLT ----------- Momentum --------------
Momentum score
Valuation score
Overall score
3m Sales
rel to mkt % rel to mkt % Implied CFROI Price, % Consensus
1m EPS
3m EPS
CFROI
Name Abs rel to Industry above/below Abs above/below FCY DY less 5-year change to (buy less holds Credit Suisse rating
average average average best & sells)
Cia Esp Petroleos 28.5 n/a 162% 3.6 85% 3.8% 1.7% 2.9 -38.6 0.0 -1.4 -6.9 -14.2 2.9 0.5 -100.0 1.5 NR
Abertis Infraestr 16.7 99% 34% 2.7 26% 5.8% 3.0% 1.7 -15.3 2.0 0.9 -1.3 -0.4 0.8 1.0 50.0 3.0 NR
Zardoya-Otis 27.1 201% 59% 31.4 100% 3.5% 3.4% -17.9 -61.8 2.0 -10.3 -0.2 -3.6 -0.1 0.0 -33.3 3.0 NR
Aguas De Barcelona 22.4 n/a 47% 1.8 -3% 2.0% 2.4% 0.6 -9.4 1.0 -0.7 0.4 -1.9 -3.7 0.5 -100.0 2.5 NR
Iberia Lineas Aere 13.9 127% 39% 0.9 -24% 12.1% 2.7% 1.8 -27.8 2.0 -0.4 -13.9 -28.0 -0.2 0.0 -39.1 3.0 NR
Ebro Puleva Sa 14.7 90% 53% 1.6 10% -3.3% 2.8% 4.9 -40.7 2.0 0.6 -3.9 -8.1 2.3 1.0 75.0 3.0 NR
Nh Hoteles 16.7 113% 13% 1.3 -12% 4.9% 2.4% 1.9 -42.1 1.0 0.1 -2.7 -8.5 0.4 1.0 -81.8 3.0 NR
Vocento 19.2 131% n/a 2.3 n/a 6.8% 3.2% 6.7 -33.5 3.0 -1.5 -13.5 -27.3 -3.6 0.0 -42.9 4.0 NR
Viscofan Sa 14.0 86% 9% 2.5 5% 8.1% 3.0% 2.9 -1.6 3.0 1.7 -0.8 -1.1 -1.4 0.5 66.7 3.5 NR
Inditex 13.3 95% -24% 5.3 -25% 4.9% 3.7% -2.4 20.5 6.0 1.4 0.4 -0.5 -1.0 1.0 24.1 7.0 Underperform
Banco Popular Espa 9.0 97% 9% 2.0 -24% n/m 5.2% -4.2 9.8 6.0 -0.2 -1.0 -2.9 -1.3 0.0 -72.4 7.0 Underperform
Bankinter Sa 13.1 141% 30% 2.1 -10% n/m 3.5% 1.3 -13.2 1.0 0.2 -2.1 -5.2 -4.7 0.5 -100.0 2.5 Underperform
Bco Esp De Credito 8.7 n/a n/a 1.7 n/a 5.7% 5.5% -0.6 10.6 7.0 -0.2 0.0 -1.3 -1.2 0.0 -30.0 8.0 Underperform
Acerinox Sa 11.2 96% 31% 1.9 29% 6.8% 2.8% -2.7 15.4 5.0 -3.4 -0.4 -6.5 -4.0 0.0 -9.1 6.0 Underperform
Bco Pastor 9.8 106% 12% 1.7 -20% n/m 3.1% n/a n/a 2.0 n/a 4.0 6.4 4.5 2.0 -62.5 5.0 Underperform
Mapfre 9.5 105% -27% 1.9 8% n/m 4.3% -1.0 -32.7 4.0 1.2 4.0 9.2 3.1 2.0 -42.9 7.0 Neutral
Source: © Datastream International Limited ALL RIGHTS RESERVED, Factset, IBES, Credit Suisse HOLT
Global Equity Strategy 15

16. 09 June 2008
Figure 45: Domestic Irish stocks that have downside on HOLT and negative earnings momentum OR are rated
Underperform by Credit Suisse analysts
-----P/E (12m fwd) ------ ------ P/B ------- Yield (08e) HOLT ----------- Momentum --------------
Momentum score
Valuation score
Overall score
3m Sales
rel to mkt % rel to mkt % Implied CFROI Price, % Consensus
1m EPS
3m EPS
CFROI
Name Abs rel to Industry above/below Abs above/below FCY DY less 5-year change to (buy less holds Credit Suisse rating
average average average best & sells)
Ryanair Hldgs 14.6 133% 1% 1.6 -57% -5.0% 0.0% -3.4 -4.8 2.0 -3.9 -12.1 -35.0 1.2 0.5 -14.3 3.5 Neutral
Allied Irish Banks 6.0 65% -23% 1.1 -44% n/m 6.7% -8.6 62.6 7.0 -2.0 -0.4 -1.9 -0.5 0.0 17.7 7.0 Underperform
Bank Of Ireland 5.2 56% -33% 1.0 -51% n/m 8.7% -11.7 89.2 7.0 -2.9 -3.9 -6.7 2.9 0.5 -33.3 8.5 Underperform
Iaws Group 13.9 85% 42% 0.3 -92% 3.6% 1.1% -0.5 -11.4 3.0 0.1 0.0 1.1 14.6 1.5 100.0 4.5 NR
Irish Contl Group 11.6 116% 42% 2.4 54% 2.3% 4.2% 2.6 -13.1 1.0 -0.1 NM NM NM 0.0 n/a 1.0 NR
Source: © Datastream International Limited ALL RIGHTS RESERVED, Factset, IBES, Credit Suisse HOLT
Shorting stocks
One of the criticisms with our view of Spain and Ireland is that it is shared by many
investors. But consensual positions can still be profitable. Below, we show how many
shares are currently borrowed as a percentage of those available (the “utilization” column
in the table). This gives an indication to the practicalities of going short. Allied Irish stands
out as a stock that does not appear to have been aggressively sold short. Note how large
the number is for some of the Spanish banks. For more information please speak to the
Credit Suisse Stock Lending desk.
Figure 46: Cost of shorting domestic Spanish and Irish stocks that are rated Underperform by Credit Suisse analysts
Utiliz ation, % of available Indicative borrow Consensus (buy less
Company CS rating Short Interest stocks borrowed fee* holds & sells)
Allied Irish Banks Underperform 2,510,000 2% 0.35% fee 18
Ryanair Hldgs Neutral 1,520,000 5% 0.4% fee -14
Bank Of Ireland Underperform 20,630,000 12% 0.35% fee -33
Mapfre Neutral 25,000,000 29% 0.75% fee -43
Inditex Underperform 20,390,000 34% 0.4% fee 24
Vocento NR 700,000 51% 11% fee -43
Ac erinox Sa Underperform 13,500,000 55% 2.5% fee -9
Bc o Esp De Credito Underperform 4,350,000 56% 4.5% fee -30
Zardoya-Otis NR 4,760,000 64% 8% fee -33
Bc o De Sabadell Underperform 46,740,000 65% 15% fee -92
Bankinter Underperform 13,210,000 68% 10% fee -100
Iberia Lineas Aere NR 52,190,000 72% 1% fee -39
Nh Hoteles NR 3,860,000 74% 5% fee -82
Bc o Pastor Underperform 4,460,000 75% 10% fee -63
Banco Popular Espa Underperform 106,580,000 79% 7.5% fee -72
Source: Data Explorer, Credit Suisse, *Credit Suisse Stock Lending desk
Italy and Greece – are they different?
Superficially, Italy and Greece may look as vulnerable as Spain and Ireland. They have
slowing growth and consumer confidence and slowing house price inflation, as well as
high current account deficits and real effective exchange rates – which is, of course,
hurting their competitiveness.
Global Equity Strategy 16

17. 09 June 2008
Figure 47: OECD lead indicators (6M ann.) for Italy and Figure 48: Consumer confidence in Italy and Greece
Greece
10% Italy Greece Euro-area 4.0 Italy Greece Euro-area
8% 3.0
6%
2.0
4%
2% 1.0
0% 0.0
-2%
-1.0
-4%
-6% -2.0
-8% -3.0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008
Source: OECD Source: © Datastream International Limited ALL RIGHTS RESERVED
Figure 49: Italy and Greece have overvalued currencies… Figure 50: ...and high negative current accounts
120% 6% Italy - current account/GDP (lhs) 0%
Italy Greece 5% Greece- current account/GDP(rhs) -2%
115% Germany France
4%
-4%
3%
110% -6%
2%
1% -8%
105%
0% -10%
-1%
100% -12%
-2%
-3% -14%
95%
-4% -16%
90%
Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007
Q2 1995 Q2 1997 Q2 1999 Q2 2001 Q2 2003 Q2 2005 Q2 2007
Source: OECD Source: © Datastream International Limited ALL RIGHTS RESERVED
We, of course, acknowledge that Italy and Greece have government debt/GDP ratios of
96% and 105%, respectively (which make aggressive fiscal stimulus packages unlikely),
and Greece has a current account deficit of 14% - which must be financed by capital
inflows. However, the two countries look better than Spain and Ireland for the following
reasons:
(1) Low consumer leverage (low household debt/GDP).
Global Equity Strategy 17

18. 09 June 2008
Figure 51: Italy and Greece have relatively low leverage
120%
Household debt/GDP
100%
80%
60%
40%
20%
0%
United States
Portugal
Ireland
Austria
United Kingdom
Netherlands
Italy
Spain
Japan
Europe
Finland
France
Greece
Poland
Belgium
Hungary
Czech Republic
Luxembourg
Sweden
Slovenia
Germany
Source: © Datastream International Limited ALL RIGHTS RESERVED
(2) Low financial product penetration.
Figure 52: Life premiums as a share of GDP and GDP per capita
14%
South Africa United Kingdom Ireland
12%
Taiwan
10%
Hong Kong
Life premiums, % of GD
Japan
8% South Korea France
Finland
Belgium
6% Portugal Switzerland
Sweden Denmark
Singapore
Italy Netherlands
US
4%
Malaysia Germ any Australia
Canada
Norway
Israel Austria
Chile Spain
Thailand
2% Hungary
China
Poland
Philippines Brazil
Argentina Czech Republic
New Zealand
Colombia IndonesiaMexico
Greece
0% Russia
0 10 20 30 40 50 60 70 80 90
GDP per capita, US$ '000s
Source: OECD, Credit Suisse Insurance Team
(3) Less of a housing bubble.
During the last 10 years, house prices have risen 102% in Italy and 150% in Greece,
against an increase of 240% in Ireland and 190% in Spain. As a consequence of that,
rental yields relative to bond yields remain well below Spanish or Irish levels. According to
our European bank team, there is no evidence to suggest that there has been a housing
bubble in either Italy or Greece – so banks’ exposure to the sector is not a big concern.
Global Equity Strategy 18