By Dan Burrows

 

¡Santo cielo!

 

Shares in two of Spain's biggest banks trading on U.S. exchanges were battered, beaten down and pretty much left for dead just a few short months ago. But extraordinary measures on the part of the European Central Bank and approval of a Spanish bank bailout have the stocks soaring, with potentially even more upside ahead.

 

In the latest development in the European debt crisis, Spain has met the conditions to get its first chunk of rescue funds, the European Commission said Wednesday. Although Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander (SAN) aren't among the basket-case banks in line for bailout funds, the news still is a boost for Spain's entire financial system.

 

Yes, it's still going to be a "challenge," in the words of the EC, to set up a so-called "bad bank" to absorb the toxic real estate assets crushing the balance sheets of so much of the nation's financial sector. But the infusion of nearly 40 billion euros should keep BFA-Bankia, NCG Banco and Catalunya Banc alive and viable for the long term. (At least, that's the plan.)

 

It's a small but critical step in restoring Spain's financial system to health, and goodness knows the country needs intensive care. The economy has sunk into its second recession in three years and the unemployment rate stands above 25% -- a level achieved by the U.S. ... during the Great Depression.

 

It's a bleak backdrop that's not getting better anytime soon, but the panic selling that smashed shares in Santander and BBVA was clearly overdone -- and both stocks still look undervalued.

 

In early 2007, BBVA was a $25 stock. As recently as last summer it went for less than $6. Santander once fetched more than $22 -- and likewise dropped to just five bucks and change during the summer panic.

 

Since then they've been trading in lockstep, with both gaining more than 50% since late July, when ECB President Mario Draghi said he would do "whatever it takes" to save the euro.

 

Both SAN and BBVA still are off about 65% from their respective pre-crisis peaks, and there's little reason to see them regaining all that lost ground anytime soon. But fear continues to trump fundamentals when it comes to valuing these names.

 

Importantly, Santander has a solid capital position, notes BPI equity analyst Carlos Peixoto, and the bank was a standout in stress-test results. Yet the stock trades at significant discounts to the European sector average.

 

BBVA, meanwhile, looks to be in even better shape, and it's likewise trading at a discount to both local and European peers. Moreover, Peixoto, who rates both SAN and BBVA at "buy," says BBVA's leading footprint in Mexico appears to be undervalued by the market. It also enjoys better-than-average asset quality in Spain.

 

Finally, let's not forget that although these are banks headquartered in Spain, they have sprawling international operations. As InvestorPlace's Charles Sizemore notes, Santander and BBVA get the vast majority of their profits overseas, and particularly from their growing Latin American subsidiaries.

 

"Both banks offer great 'back door' access to one of the few areas of the globe that's still growing," he writes.

 

It's sure to be a volatile ride, but if investors can stomach it, SAN and BBVA could rally into year-end and beyond.

 

As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.

 

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