Banco Bilbao: Resilient NIMs and Higher Expected Share Buybacks Support 15% Fair Value Increase

After incorporating Banco Bilbao Vizcaya Argentaria's strong finish to fiscal 2024 and better-than-expected guidance into our model, we raise our fair value estimate by 16% to EUR 10.70/share. We now believe that net interest margins will be more resilient, resulting in flat revenue growth despite our expectation of rate cuts in the second half of 2024. Banco Bilbao’s dynamic approach to managing interest-rate risk has paid off handsomely over the current interest-rate cycle. Its hedging strategy increased its interest-rate sensitivity when rates were low, allowing Banco Bilbao to benefit from increasing rates. With rates now set to decline, Banco Bilbao has lowered its interest rate sensitivity significantly, which should protect its NIM. We expect loan-loss provisions to increase somewhat, with Turkish credit losses set to normalize. However, we still view Banco Bilbao’s credit quality as sound. We do not foresee the cost/income ratio improving as revenue growth prospects are constrained. Banco Bilbao’s high profitability will continue to support robust organic capital generation and we bake in annual share buybacks of around EUR 2 billion over the next three years in our model.