EARNINGS PREVIEW: BBVA, Santander Seen Steady In 3Q

TAKING THE PULSE: In a tough environment for commercial banks, Spain's two largest banks are expected to show a steady performance in the third quarter as they rely on strong lending margin growth to smooth out rising in loan loss provisions.

Being big and sturdy is helpful in an economic slump, and Banco Bilbao Vizcaya Argentaria SA (BBV) and Banco Santander SA (STD) likely continued in the third quarter to attract clients looking to bank with two of the strongest banks in the world. Both banks also recently made progress in their capital-raising efforts, easing concern about their ability to digest the growing pool of problematic loans.

ANALYST PICKS: Despite a strong run year-to-date by both stocks – Santander is up 74% and BBVA is up 51% - most analysts continue to see value in holding both names. Brokers including Morgan Stanley, JP Morgan, Citi and Nomura reiterated outperform ratings ahead of results.

*Banco Bilbao Vizcaya Argentaria SA (BBV) -- (Oct. 27)

MARKET EXPECTATIONS: BBVA is expected to report a 6.1% drop in third-quarter net profit, to EUR1.31 billion, according to a Dow Jones Newswires poll of 10 analysts, as its loan book continues to deteriorate. Analysts expect the bank to set aside more funds to cover loan losses than in the second quarter, reflecting prolonged recessions in Spain and Mexico.

Iberian operations are expected to remain fairly resilient, while Latin American operations could post a small increase in profits. Mexico likely will continue to weigh on earnings and the contribution from the U.S. will be limited by high impairments. Net interest income is seen up 10% to EUR3.36 billion, boosted by wider lending margins and a positive repricing effect.

MAIN FOCUS: After BBVA recently took over failed U.S. bank Guaranty, investors are wondering whether the bank will stop there or if this is only the beginning. Tuesday will also be the first time BBVA's recently appointed chief executive Angel Cano speaks to analysts and reporters for the first time.

*Banco Santander SA (STD)--(Oct. 28)

MARKET EXPECTATION: Analysts expect Santander to post an 0.2% decline in third-quarter net profit, to EUR2.2 billion. The bank likely benefited from its strong position compared to weaker peers in markets like the U.K. and Spain. In Latin America, weaker local currencies versus the euro will mask otherwise robust growth. Brazil is likely to have benefited from cost cutting following the merger of its assets there, while Mexico is expected to have been weak.

A Dow Jones Newswires poll of eight analysts calls net interest income of EUR6.636 billion, up 21% on the year.

MAIN FOCUS: Some further clarification on dividend policy is expected, following recent press speculation that Santander may consider a special dividend next year. Investors will also be looking for an update on the progress of cos-cutting in Brazil and on the integration of recent purchases in the U.K.

-By Christopher Bjork, Dow Jones Newswires, [phone], [e-mail]