BBVA Earnings: Another Excellent Result, but Momentum Is Slowing Down

Wider net interest margins as a result of higher interest rates continue to drive healthy earnings growth for narrow-moat BBVA 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.

BBVA’s share price has increased by 73% over the last year, the largest increase of the European banks we cover. Despite the rally in its share price, BBVA still trades at a 23% discount to our EUR 9.30 per-share fair value estimate. BBVA now generates an annualized 17% return on tangible equity, yet it continues to trade at a discount to its tangible book value. BBVA trades at only 5.3 times our earnings estimate for fiscal 2023, while over the past decade it has traded at 10 times its forward earnings. Thus, the market is suggesting that current earnings are materially (around 50%) overstated. We do not see anything that would suggest earnings are about to plummet. While there are now other banks in our coverage that offer greater upside, we still like BBVA’s fundamentals and given its different geographic mix it offers some diversification potential for benchmark-cognizant investors.