SAN Banco Santander SA

By Jeannette Neumann

MADRID--Plunging oil prices, global market turmoil and uncertainty over the makeup of Spain's next government have been walloping Spanish banks' shares ahead of quarterly results that investors and analysts don't expect to provide much cheer.

Investors say they will be looking at whether the banks are boosting capital ratios to better position their balance sheets against the turbulence. "The market is a lot more focused on capital developments," said Iacopo Dalu, at London-based hedge fund Amber Capital.

Overall, Spain's major domestic banks and the Spanish units of Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA are expected to report a slight decline in net interest income in the fourth quarter compared with the previous three months, Société Générale SA analyst Carlos García González said. That measure of profit is being hit by rock-bottom interest rates and shrinking total loan volume as individuals and businesses continue to reduce their debt.

With Spain's economy growing, provisions for bad loans at most of the banks are likely to fall in the fourth quarter compared with a year earlier. But investors and analysts say the decline will be less pronounced because of the additional funds lenders are expected to cough up to cushion against potential losses at Abengoa SA, a major Spanish renewable energy and engineering firm that filed for preliminary creditor protection in November.

Each bank is also required by Spanish regulators to book its contributions to Spain's deposit guarantee fund in the fourth quarter.

Spain's banks are reporting their 2015 annual results against an uncertain global backdrop that has sent stock markets into a tizzy as traders fret about Chinese growth, oil price declines and the impact of the U.S. Federal Reserve's lifting of interest rates.

The landscape at home is also rocky, as Spaniards wait to see which political parties will join to form a government in the wake of December's inconclusive parliamentary election.

The governing coalition that emerges will decide whether to continue selling off shares in Bankia SA, which is 64% owned by the state. The privatization of Spain's No. 4 bank by market value, which was bailed out in 2012, has been on hold since the government sold a small share in 2014.

An independence movement in the wealthy Catalonia region has been gathering steam, raising concern about the future of two major banks based there, Caixabank SA and Banco de Sabadell SA.

At Santander and BBVA, investors say they will be closely attuned to capital ratios. In the third quarter of last year, Santander's capital ratio inched only slightly higher from the previous three months and BBVA's fell, and both remained below those of big-bank peers. Investors say they want to see signs of fourth-quarter improvement.

Analysts anticipate that declines in the currencies of emerging markets will chip away at Santander's and BBVA's profits when they are converted into euros on the lenders' financial statements. Emerging markets, primarily Mexico and Turkey, generate two-thirds of BBVA's earnings. Brazil, which is in recession, contributes about one-fifth of Santander's net profit.

"We continue to see their emerging markets operations as an area of risk," Barclays PLC analyst Rohith Chandra-Rajan wrote in a research report.

Capital ratio worries, emerging market currency concerns and a 7.5-billion-euro ($8.1 billion) share sale in January 2015 have sent Santander's stock price down around 35% in the past 12 months, Ana Botín's first full year as executive chairman.

The decline has been so great that analysts who have typically shunned Santander shares took notice.

"We do not believe Santander has created value for its shareholders over the past 15 years," Exane BNP Analyst Santiago López Díaz wrote in a research report. "At its current price, however, Santander represents a reasonable investment with a relative margin of safety within European banking."

Santander reports fourth-quarter earnings on Wednesday.

When Caixabank announces results two days later, investors say they will look at how much the lender writes down the value of its stake in Spanish oil major Repsol SA.

Oil's price dive has driven down Caixabank's 9.5% direct holding in Repsol to EUR1.1 billion from the estimated EUR2.7 billion value the lender has assigned to the investment in financial statements, Morgan Stanley analyst Alvaro Serrano wrote in a research report.

"They're not going to write it down all the way to the current market value, because that will erode too much capital," Berenberg Bank analyst Andrew Lowe said. He expects a smaller write-down to "appease the regulators that they're doing something about it."

He said he believes Caixabank's sale of two stakes in December is evidence of pressure from regulators on European banks to strengthen capital. For Caixabank, he added, "the Repsol issue is the next step to address."

Banco Popular Español SA, which also reports on Friday, has a hefty portfolio of nonperforming property loans that still choke its balance sheet eight years after Spain's real-estate boom went bust.

Investors say they would like to see Popular sell off soured loans and foreclosures more quickly. But its low provisions on bad debts means the bank would have to sell at a steep loss, and that poses a dilemma: Popular could either redirect more revenue toward provisions to boost coverage levels, eating up profits, or sell additional shares in the market to raise funds, making current shareholders' investments worth less.

As Popular tries to figure out its action plan, investors' concerns have snowballed, sending the bank's shares nosediving more than 20% since the beginning of the year.

Spain's banks are reporting their 2015 annual results against an uncertain global backdrop that has sent stock markets into a tizzy as traders fret about Chinese growth, oil price declines and the impact of the U.S. Federal Reserve's lifting of interest rates.

The landscape at home is also rocky, as Spaniards wait to see which political parties will join to form a government in the wake of December's inconclusive parliamentary election.

The governing coalition that emerges will decide whether to continue selling off shares in Bankia SA, which is 64%-owned by the state. The privatization of Spain's No. 4 bank by market value, which was bailed out in 2012, has been on hold since the government sold down a small share in 2014.

An independence movement in the wealthy Catalonia region has been gathering steam, raising concern about the future of two major banks based there, Caixabank SA and Banco de Sabadell SA.

At Santander and BBVA, investors say they will be closely attuned to capital ratios. In the third quarter of last year, Santander's capital ratio inched only slightly higher from the previous three months and BBVA's fell, and both remained below those of big-bank peers. Investors say they want to see signs of fourth-quarter improvement.

Analysts anticipate that declines in the currencies of emerging markets will chip away at Santander's and BBVA's profit when they are converted into euros on the lenders' financial statements. Emerging markets, primarily Mexico and Turkey, generate two-thirds of BBVA's earnings. Brazil, which is in recession, contributes about one-fifth of Santander's net profit.

"We continue to see their emerging markets operations as an area of risk," Barclays PLC analyst Rohith Chandra-Rajan wrote in a research report.

Capital ratio worries, emerging market currency concerns and a €7.5 billion ($8.1 billion) share sale in January 2015 have sent Santander's stock price down around 35% in the past 12 months, Ana Botín's first full year as executive chairman.

The decline has been so great that analysts who have typically shunned Santander shares took notice.

"We do not believe Santander has created value for its shareholders over the past 15 years," Exane BNP Analyst Santiago López Díaz wrote in a research report. "At its current price, however, Santander represents a reasonable investment with a relative margin of safety within European banking."

Santander reports fourth-quarter earnings on Wednesday.

When Caixabank announces results two days later, investors say they will look at how much the lender writes down the value of its stake in Spanish oil major Repsol SA.

The oil-price dive has driven down Caixabank's 9.5% direct holding in Repsol to €1.1 billion from the estimated €2.7 billion value the lender has assigned to the investment in financial statements, Morgan Stanley analyst Alvaro Serrano wrote in a research report.

"They're not going to write it down all the way to the current market value, because that will erode too much capital," Berenberg Bank analyst Andrew Lowe said. He expects a smaller write down to "appease the regulators that they're doing something about it."

He said he believes Caixabank's sale of two stakes in December is evidence of pressure from regulators on European banks to strengthen capital. For Caixabank, he added, "the Repsol issue is the next step to address."

Banco Popular Español SA, which also reports on Friday, has a hefty portfolio of nonperforming property loans that still choke its balance sheet eight years after Spain's real-estate boom went bust.

Investors say they would like to see Popular sell off soured loans and foreclosures more quickly. But its low provisions on bad debts means the bank would have to sell at a steep loss, and that poses a dilemma: Popular could either redirect more revenue toward provisions to boost coverage levels, eating up profits, or sell additional shares in the market to raise funds, making current shareholders' investments worth less.

As Popular tries to figure out its action plan, investors' concerns have snowballed, sending the bank's shares nose-diving more than 20% since the beginning of the year.

Write to Jeanette Neumann at jeanette.neumann@wsj.com

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