Spanish banks a buy for first time 'in years'

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Analysts are starting to see value in Spanish banks for the first time in years, despite anticipating further earnings downgrades and heavy regulatory headwinds later on this year.

Spain's main lenders post earnings on Thursday and are expected to report more pressure on profits despite being granted 100 billion euros of European aid.

(Read more: Why hopes of Spain's recovery may be 'far too optimistic')

However, John-Paul Crutchley, European bank analyst at UBS said while Spain's economy remains challenging, there are signs of improvement in unemployment and consumption, and he believes the debate has moved on from balance-sheet issues.

"We expect the sector to book virtually no profits in the second quarter excluding one-offs to meet provisioning needs. The outlook for the second half remains challenging," he said. "But since the beginning of the year, we have become gradually less negative on Spanish banks... We are starting to see some value in several banks for the first time in years."

Crutchley believes earnings for Spain's banking sector could soon bottom out.

BBVA is Crutchley's top pick out of Spanish banks because of its exposure to the Mexican market. He predicts the stock, which is down 7 percent so far this year, will rise 18 percent in the next 12 months. Crutchley upgraded the stock earlier this week to a "buy" from "neutral" with a price target of 7.60 euros.

Steven Bryce, research analyst at Credit Suisse said "spring cleaning" was in progress in Spain's banking sector and the restructuring of bank balance sheets had advanced.

"The majority of measures of Spain's financial sector program have been implemented and recapitalization together with the transfer of assets to Sareb, the bad bank set up at the end of last year, has bolstered banks' liquidity and solvency," said Bryce.

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Credit Suisse prefers shares of BBVA and Santander, though both are rated "neutral." Bryce said he remain cautious and while the valuations have become cheaper, Spanish bank stocks are still risky. Credit Suisse rates Banco de Sabadell as "underperform" because of capital concerns.

But other analysts are not so upbeat about the prospects for Spanish lenders, with Jason Napier, research analyst at Deutsche Bank revising down both Santander and BBVA's estimates because of difficult conditions in the Latin American market and volatile foreign exchange rates.

"Brazil, Mexico and Chile are all showing decelerating loan growth, with non-performing loans rising in Mexico and Chile. Naturally, we still expect growth from these markets for BBVA and Santander shareholders, but we expect consensus expectations for these businesses to fall near term," he said.

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Shailesh Raikundlia, European banks analyst at Espirito Santo said Spanish banks still haven't booked enough provisions to pay for future losses.

"We don't see a recovery in Spain and continue to think that impairments are going to run higher than the market is expecting," he said.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave