Company Reports

Narrow-moat Banco Bilbao Vizcaya Argentaria confirmed on May 1 that it proposed a merger to the board of Banco Sabadell, Spain's fourth-largest bank. While we believe the strategic rationale for the deal is compelling, we think BBVA is offering a full price. We estimate that BBVA's all-share offer values Sabadell at 0.9 times its latest tangible book value. This valuation seems about right if we consider that PitchBook consensus expects a return on tangible equity of around 11% over the next three years. Still, it does not leave much on the table for BBVA shareholders. The upside to BBVA shareholders will primarily come from synergies. BBVA expects annual synergies but will incur EUR 1.5 billion in cumulative restructuring costs to achieve this. Our narrow moat rating for BBVA relies mainly on the strength of its highly profitable Mexican operation. One can argue that the dilution of the Mexican contribution narrows BBVA's moat. However, the deal will strengthen BBVA's competitive position in Spain significantly, which could force us to reconsider our previous view that BBVA does not possess a moat in its Spanish business. Until there is greater clarity, we will maintain our EUR 11.50 per share fair value estimate.

Narrow-moat Banco Bilbao Vizcaya Argentaria, or BBVA, reported a net attributable profit of EUR 2.2 billion for the first quarter of 2024, comfortably ahead of the EUR 2 billion that the consensus of analysts polled by BBVA expected. Contrary to our expectations, net interest income continued its upward trend. BBVA also increased its 2024 guidance as it now expects double-digit net attributable profit growth driven by higher-than-expected net interest income growth from its Spanish operations. We have increased our fair value estimate to EUR 11.50 per share from EUR 10.70 per share to reflect the better-than-expected results and higher guidance.

We believe that Banco Bilbao Vizcaya Argentaria will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. Due to its significant emerging market presence, investors often perceive BBVA as riskier than other European banks. There are, however, several mitigating factors for any higher country risk. First, BBVA tends to hold a dominant position in the countries it operates in, with significant market shares in low-cost demand deposits, supporting profitability. Secondly, BBVA is a retail and commercial bank with limited exposure to volatile investment banking activities. Thirdly, diversification across different geographies reduces earnings volatility and BBVA's earnings have historically been more stable than most other European banks we cover. We also highlight that BBVA's decentralised funding model limits its exposure to the equity investment in each subsidiary.

We believe that Banco Bilbao Vizcaya Argentaria will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. Due to its significant emerging market presence, investors often perceive BBVA as riskier than other European banks. There are, however, several mitigating factors for any higher country risk. First, BBVA tends to hold a dominant position in the countries it operates in, with significant market shares in low-cost demand deposits, supporting profitability. Secondly, BBVA is a retail and commercial bank with limited exposure to volatile investment banking activities. Thirdly, diversification across different geographies reduces earnings volatility and BBVA's earnings have historically been more stable than most other European banks we cover. We also highlight that BBVA's decentralised funding model limits its exposure to the equity investment in each subsidiary.

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.

Narrow-moat Banco Bilbao reported a net income of EUR 2.1 billion for the third quarter of 2023, which was 13% higher than it reported a year earlier and slightly ahead of the company-compiled consensus. Revenue is still growing ahead of expectations, with net interest margins expanding as the pass-through of higher interest rates to depositors remains below expectations. The healthy growth in fee income is a pleasing development as we believe that the tailwind from higher interest rates will increasingly subside and European banks will need other avenues to drive revenue growth. Banco Bilbao saw negative operating leverage for the quarter, with operating expenses growing ahead of revenue and consensus expectations. The hyperinflationary situation in Turkey does distort matters somewhat, but Banco Bilbao still saw positive operating leverage in its two largest markets, Mexico and Spain. There was a slight deterioration in asset quality metrics for the quarter, and loan loss provisions came in ahead of consensus.

Wider net interest margins as a result of higher interest rates continue to drive healthy earnings growth for narrow-moat BBVA. The firm reported net income of EUR 2 billion for second-quarter 2023, which was 10% higher than what it reported a year earlier and also 10% ahead of company-compiled consensus. BBVA is on track to achieve our net income estimate of EUR 8 billion for fiscal 2023. Management now expects BBVA to generate a return on tangible equity in the midteens for 2024; previous guidance was 14%. However, earnings momentum is clearly slowing down as the tailwind from higher interest rates is now largely in the base. While net interest income increased by 26% year on year it was only 2% higher than what BBVA booked in first-quarter 2023. BBVA also announced a EUR 1 billion share buyback program, equal to around 2% of BBVA’s current market value.

Narrow-moat BBVA reported excellent results for the first quarter of 2023, with net profit increasing by 39% compared with the first quarter of 2022 and 18% sequentially. The bank beat the consensus expectation of analysts polled by the company by 11%, and generated a return on tangible equity of 16%, despite having excess capital of EUR 4 billion (10% of its current market value). We do not believe BBVA's current valuation adequately captures its superior profitability, surplus capital, and secular growth opportunities. We expect consensus to upgrade its estimates closer to ours. It currently trades at 0.9 times its tangible book value—in line with the average multiple over the last decade. Still, we believe the bank deserves a higher rating, given the structural reset in its profitability. Between 2010 and 2019, it traded at an average of 1.2 times its tangible book value, yet it only generated an average return on tangible equity of 11% during this period. We maintain our EUR 9.30 per share fair value estimate. We view BBVA as one of the most attractively valued European banks we cover.

Stress has returned to the European banking system less than a week after a solution for Credit Suisse had been announced. Shares in European banks have traded down through March 24 around midsingle digits, with Deutsche Bank taking the brunt of it, down 15% at its lowest point intraday. We maintain our fair value estimates and moat ratings across our European banking coverage. Allianz remains our Best Idea. Admiral is one of our top picks

With Credit Suisse shoring up liquidity, concerns around a banking crisis spreading in Europe have been firmly planted. While we expect that the next days and weeks will remain volatile, we do not currently see a liquidity crisis spreading through the European banking system. The issues at Credit Suisse are idiosyncratic in nature and we believe containable for now even in a worst-case scenario. With capital and liquidity levels high across the board, asset quality still good, and regulators much better equipped than 15 years ago to quell any sparks, we believe European banks are solid. The major caveat being that developments are currently happening at a rapid pace and views we form today may be stale tomorrow. We believe investors are best placed in European banks with a greater retail focus and a sound profitability outlook. We would highlight BBVA, Handelsbanken, ING, and Lloyds.

We believe that Banco Bilbao Vizcaya Argentaria, or BBVA, will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. Due to its significant emerging market presence, investors often perceive BBVA as riskier than other European banks. There are, however, several mitigating factors for any higher country risk. First, BBVA tends to hold a dominant position in the countries it operates in, with significant market shares in low-cost demand deposits, supporting profitability. Secondly, BBVA is a retail and commercial bank with limited exposure to volatile investment banking activities. Thirdly, diversification across different geographies reduces earnings volatility and BBVA's earnings have historically been more stable than most other European banks we cover. We also highlight that BBVA's decentralised funding model limits its exposure to the equity investment in each subsidiary.

We believe that Banco Bilbao Vizcaya Argentaria, or BBVA, will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. We do not believe that this superior profitability comes with substantially higher risks, as BBVA's geographical diversification and its retail and commercial focus offsets some of the risk that comes with BBVA's geographical tilt toward more volatile emerging markets.

Narrow-moat Banco Bilbao Vizcaya Argentaria reported another excellent set of results for the final quarter of 2021. Net attributable profit of EUR 1.3 billion for the quarter came in at nearly double the EUR 773 million (excluding non-recurring items related to the disposal of the firm's U.S. business) reported a year ago. The bank crushed the EUR 1 billion consensus quarterly net profit expectation of analysts polled by S&P Capital IQ. Guidance for 2022 is bullish. The firm anticipates double-digit core revenue growth, a lower cost-income ratio, and loan loss provisions slightly lower than pre-COVID-19 levels. Current consensus estimates call for a 10% decline in pretax profits. The estimate seems at odds with company guidance, and we anticipate that there will be earnings updates that could further support the recent share price recovery.

Narrow-moat Banco Bilbao Vizcaya Argentaria, or BBVA, announced an offer to acquire the 51% stake it does not own yet in its listed Turkish subsidiary, Garanti. Suffering from spiralling inflation and a collapsing currency, Turkey does not seem an obvious investment destination currently. The market agreed with this sentiment; BBVA’s share price has declined by 6% since the announcement. The market now values BBVA at EUR 2.1 billion less than before the announcement, while the buyout will require a capital layout of EUR 2.2 billion by BBVA. Effectively, the market believes the deal will be fully value destructive but we disagree. Garanti is an excellent bank that BBVA knows inside out; BBVA is getting it at a fantastic price and there are capital synergies. The deal will boost BBVA’s earnings by 14% and it will improve BBVA’s return on equity. We view potential higher volatility due to currency translation as the main downside risk of the deal. We expect to increase our current fair value estimate of EUR 6.10/share by at least 10% should the transaction go through. Until we have greater clarity on how many Garanti investors accepted the offer, we will maintain our fair value estimate at EUR 6.10/share.

Narrow-moat Banco Bilbao Vizcaya Argentaria reported net attributable profit of EUR 1.4 billion for the third quarter of 2021 compared with EUR 1.1 billion in the same period a year ago and 30% ahead of the EUR 1.1 million the consensus of analysts polled by BBVA’s investor relations expected for the quarter. Revenue came in 5% ahead of consensus expectations, while loan-loss provisions came in 32% lower than expected, which were the two major drivers of the earnings beat. Quarterly revenue grew by a robust enough 7% year on year, but operating expenses grew 10%, without any material one-off items distorting it. One should be careful to make too much out of one quarter’s cost growth overshooting, but it is a number that stands out and we will keep an eye on it in future results. BBVA also confirmed that it has received regulatory approval to buy back EUR 3.5 billion of its own shares. We maintain our narrow moat rating and EUR 6.10 fair value estimate.

We believe Banco Bilbao Vizcaya Argentaria, or BBVA, allocates capital in an excellent way and award it an Exemplary rating. BBVA’s recent disposal of its US operations is a textbook example of excellent capital allocation. With this transaction, BBVA strengthened its balance sheet, sharpened its strategic focus, improved profitability, and returned excess capital to shareholders. In other smaller transactions, BBVA achieved similar results in the past. We maintain our narrow moat rating and our EUR 6.10/share fair value estimate.

We believe that Banco Bilbao Vizcaya Argentaria, or BBVA, will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. We do not believe that this superior profitability comes with substantially higher risks, as BBVA's geographical diversification and its retail and commercial focus offsets some of the risk that comes with BBVA's geographical tilt toward more volatile emerging markets.

Narrow-moat Banco Bilbao Vizcaya Argentaria, or BBVA, performed well under the recent European Banking Authority, or EBA, stress test--especially if one adjusts for the positive capital impact of the sale of BBVA’s United States operations--which the regulator did not include in the stress test. Under the adverse scenario of the stress test, BBVA’s common equity Tier 1 ratio declines to 8.70% in 2023. This level of capital is barely ahead of the 8.60% regulatory minimum common equity Tier 1 ratio under which BBVA would still be able to pay dividends; however, this does not include the 2.40% boost BBVA’s common equity Tier 1 ratio received from the disposal of its U.S. operations during 2021. BBVA’s common equity Tier 1 ratio declined by 3.00% under the adverse scenario of the stress test from the 11.7% BBVA reported at the end of 2020. The average European bank we cover saw its common equity Tier 1 ratio shrink 4.60% when stressed under the adverse scenario. If we compare BBVA’s performance under the adverse scenario with the baseline scenario, revenue was more volatile than its peers. However, loan losses increased the least of all European banks we cover. We maintain our euro-share fair value estimate and our narrow moat rating.

We believe that Banco Bilbao Vizcaya Argentaria, or BBVA, will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. We do not believe that this superior profitability comes with substantially higher risks, as BBVA's geographical diversification and its retail and commercial focus offsets some of the risk that comes with BBVA's geographical tilt toward more volatile emerging markets.

Narrow-moat Banco Bilbao Vizcaya Argentaria reported net attributable profit of EUR 701 million for the second quarter of 2021 compared with EUR 603 million a year ago for the same period and 85% ahead of the EUR 379 million that the consensus of analysts polled by BBVA’s investor relations expected for the quarter. If one excludes nonrecurring items--the EUR 696 million charge for the restructuring of BBVA’s Spanish operations and the final capital gain of EUR 103 million related to the disposal of BBVA’s U.S. operations--attributable profit came in at EUR 1.3 billion, 35% more than the comparable number expected by consensus. Loan-loss provisions coming in lower than expected explains most of the earnings beat. All the operating divisions exceeded consensus expectations, but the performance from the Spanish and Turkish businesses were materially better than expected. We maintain our narrow moat rating and EUR 5.90 fair value estimate.