U.S. Markets close in 1 hr 41 mins

Catalonia casts shadow on positive BBVA, Sabadell results

FILE PHOTO: People line up at a Sabadell Bank ATM machine in Barcelona to withdraw money as part of an action to protest the transfer of the bank's headquarters out of Barcelona, Spain, October 20, 2017. REUTERS/Ivan Alvarado

By Jesús Aguado

MADRID (Reuters) - Broadly positive results from BBVA (BBVA.MC) and Sabadell (SABE.MC) were overshadowed on Friday by growing fears over the impact of Catalonia's bid for independence.

The crisis has split Catalonia and caused deep resentment around Spain. It has also prompted a flight of business from the wealthy region and alarmed European leaders who fear the crisis could fan separatist sentiment around the continent.

BBVA and Sabadell are among the Spanish banks with the highest exposure to the region, where Madrid was preparing to impose direct rule on Friday

Shares in Sabadell were the among the worst performers on Spain's Ibex-35 (.IBEX) falling 4.5 percent, while BBVA dropped 1.8 percent as investors focussed on events in Catalonia.

"We did see some movements of deposits during a few days but really nothing material and things have really normalised but there were some days when clients were nervous about the uncertainty," BBVA's chief executive officer, Carlos Torres, told analysts

Deposits in the northeastern region were safe, although if the situation persists it could cut Spanish growth to less than 2.5 percent in 2018, he later added.

Although BBVA is based in the northern city of Bilbao it became one of the biggest lenders in Catalonia after buying two former savings banks in the region, Catalunya Banc and Unnim.

In an attempt to calm clients, Sabadell decided in early October to move its legal headquarters out of Catalonia.

While an economic recovery and a property rebound has allowed most of Spain's banks to tackle toxic balance sheets faster than peers in Italy, the results from BBVA and Sabadell underlined that pressure on revenue from lending remains.

Spanish banks are struggling to lift earnings from loans, as interest rates hover at historic lows and increasing competition erodes margins.

BBVA's net interest income (NII), or profit from loans minus funding cost, was down around 2 percent against the previous quarter, while Sabadell's NII fell 4 percent.

To offset pressure at home, Spanish banks have been expanding abroad in search of higher revenues.

BBVA's net profit was up 19 percent up for the period July to September to 1.14 billion euros, slightly above analysts' forecast in a Reuters poll, boosted by Mexico, which accounts for more than 40 percent of its earnings.

Net profit at Sabadell however fell 8 percent in the third quarter to 203 million euros, below analysts' forecasts, after its bottom line was impacted by the sale of some its units.

The lender however stuck to its profit target of 800 million euros for 2017.

Friday's results showed BBVA, the country's second biggest bank by assets, reduced its non-performing loans by 1.5 billion euros ($1.7 billion) in the quarter, while Sabadell reduced its problematic assets by 500 million euros.

Sabadell's chief executive, Jaime Guardiola, said it would also meet its target of reducing problematic assets by 2 billion euros by year-end despite the political uncertainty.

The European Central Bank announced this month new guidelines for lenders to reduce bad loans, although the plans are meeting with a fierce backlash in Italy.

Italian banks have more than 210 billion in non-performing exposure, while Spanish banks have combined non-performing loans of 106 billion euros.

(Reporting by Jesús Aguado; Editing by Paul Day and Alexander Smith)