Tickers in this Article: BBVA, STD, C, HSB
With more than a few U.S. bank stocks still looking undervalued, it may seem crazy to think about buying a bank with large exposure to the disaster zone that is the Spanish banking sector. Yet, risk-tolerant investors with long-term horizons may well like what they see at BBVA (NYSE:BBVA). While this large global bank is not yet in the clear with respect to Spain, this company's growth-oriented global footprint is attractive, with the stock trading below tangible book.

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Spain - Bad and Likely to Get Worse
Like Santander (NYSE:STD), BBVA is one of the largest banks operating in Spain, and has suffered as the economy and banking sector of Spain has flirted with collapse. Counter-intuitive as it may seem, BBVA just got even bigger in Spain. BBVA agreed to buy Unnim in a deal somewhat similar to those we saw in the U.S. during the worst of the credit crisis - a seriously distressed bank is getting taken over by a healthier player for a nominal fee and getting government support to do it. This deal will double the company's exposure to the Catalonia area of Spain.

About the best that can be said about BBVA's Spanish operations is that they're less-bad than many others. That said, BBVA does a lot of public sector lending in Spain and that's a big risk right now. With unemployment around 20% and major debt issues, Spain is looking at a long and hard road back to anything like normal.

SEE: Earning Forecasts: A Primer

Latin America Is a Growth Story
Like Santander, BBVA also has sizable operations in Latin America. BBA Bancomer is the #1 bank in Mexico, with approximately 30% share. Given the involvement of Citigroup (NYSE:C), Santander, HSBC (NYSE:HBC) and Bank Of Nova Scotia (NYSE:BNS), it's not as though BBVA got big by beating up on weak competitors.

Mexico's economy hasn't been especially robust of late, and its health is tied to the U.S. to a meaningful degree. Still, this may be more of a growth opportunity than many investors appreciate. Mexico is seriously under-banked, and turning more working Mexicans into banking customers is a legitimate long-term opportunity. It's also worth noting that Bancomer is very profitable for BBVA - it commands about 18% of the company's capital, but produces more than one-third of its pre-tax profit.

Other Business Are Far From Also-Rans
The chaos in European banking has put the breaks on some of BBVA's growth plans, but there are still more than a few irons in the fire. For instance, BBVA owns 25% of Turkey's Garanti. BBVA also boasts of profitable operations throughout Central and South America - like Mexico, these operations contribute a disproportionate share of profits relative to the capital invested.

BBVA's U.S. operations have been less successful - maybe not so surprising considering that BBVA bought Compass back in early 2007. Texas is still an appealing market within the U.S., though, so it doesn't seem too optimistic to think that BBVA can do better here over the long term.

The Bottom Line
There's not much debate that BBVA's Spanish operations are going to be a drag for many years. At this point, the question is how much worse it will get and how much capital BBVA will need to see it through to the end. There's also a real risk that torrid growth in Latin America is due for a pause or more serious correction.

All of that said, BBVA is trading for about 10% less than its tangible book value. It also looks quite cheap on the basis of an excess returns model. If BBVA can regain 12% returns on equity by 2016, even a 12.5% discount rate points to a double-digit fair value.

This is by no means a safe stock, and investors considering it have to accept the risk that conditions could get quite a bit worse. That said, the opportunity to buy a well-run and geographically diverse franchise for less than tangible book is worth considering.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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