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22 January 2018
Iro Papadopoulou
Specialist Sales
+44 20 3207 7924
iro.papadopoulou@berenberg.com
THE TEAM
Andrew Lowe joined Berenberg’s Banking team in 2012, having previously spent two years
working as an equity analyst at hedge fund TT International. Andrew graduated from the
University of Oxford with a first-class Masters degree in Mathematics and is a CFA charter
holder.
Iro Papadopoulou joined Berenberg in April 2013. Iro is a chartered accountant and has a
Masters in Finance from the London Business School. Before joining Berenberg, Iro worked
at the Bank of Cyprus in investor relations and as an equity analyst at UBS and Merrill
Lynch in London.
For our disclosures in respect of Article 20 of Regulation (EU) No. 596/2014 of the
European Parliament and of the Council of 16 April 2014 on market abuse (market abuse
regulation – MAR) and our disclaimer please see the end of this document.
Please note that the use of this research report is subject to the conditions and restrictions
set forth in the disclosures and the disclaimer at the end of this document.
Banking
Table of contents
Spanish banks: still waiting for Godot 4
CaixaBank SA 34
Berenberg estimates 46
BBVA SA 47
3
Banking
Implied net income if PE … Consensus net income Required uplift in current consensus P/E
Market Cap 11.0x 10.0x 9.0x as at January 2017 consensus EPS
January 2017 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019
EURbn EURm EURm EURm EURm EURm EURm % % % x x x
Bankia 13.4 1,218 1,340 1,489 837 863 964 45% 55% 55% 16.0x 15.5x 13.9x
Bankinter 7.6 691 760 844 464 508 560 49% 50% 51% 16.4x 15.0x 13.6x
BBVA 49.7 4,518 4,970 5,522 4,021 4,189 4,566 12% 19% 21% 12.4x 11.9x 10.9x
CaixaBank* 25.6 2,327 2,560 2,844 1,787 2,067 1,929 30% 24% 47% 14.3x 12.4x 13.3x
Sabadell 10.5 955 1,050 1,167 793 830 982 20% 26% 19% 13.2x 12.6x 10.7x
Santander 95.5 8,682 9,550 10,611 6,440 7,568 8,480 35% 26% 25% 14.8x 12.6x 11.3x
Average Domestic 3,881 4,268 4,434 36% 39% 43% 15.0x 13.9x 12.9x
Average BBVA/SAN 24% 22% 23% 13.6x 12.2x 11.1x
Chart 2: Interest rate expectations have ebbed and flowed Chart 3: While the US banks have widespread excess deposits…
Implied probability of an ECB deposit rate hike by end-2018 Cumulative share of deposits as ranked by loan-to-deposit ratio
100% 100%
90% 90%
Cumulative share of deposits
Jun-17
Jul-17
Aug-17
Sep-17
Oct-17
Dec-17
Jan-18
Nov-17
Chart 4: … European and Spanish banks do not Chart 5: Expiry of TLTRO II may erode NII by c4%
Cumulative share of deposits as ranked by loan-to-deposit ratio Estimate impact on NII and EPS from expiry of TLTRO II
100% 30% 20% 10% 0% 10% 20%
90% 52% of deposits
are with banks BPM 8.5%
Cumulative share of deposits
5
Banking
2% 0.6%
0.4% 2018 2019
0% 0.2%
0.0%
-2%
Jul-10
Jul-12
Jan-14
Jul-14
Jan-15
Jul-15
Jan-17
Jul-17
Jan-11
Jul-11
Jan-13
Jul-13
Jan-16
Jul-16
Jan-10
Jan-12
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Chart 8: Spanish banks’ total impairments have lagged peers… Chart 9: …but the pace of real estate sales is accelerating
Total impairments over crisis as % of pre-crisis lending Spanish foreclosed real estate as % of assets
20% 2008-2010 7% Post PE Sales
18.1% 18.2%
18% As labelled Pre PE sales
15.9% 6% 6.5%
16%
5% 5.7%
14% 13.0%
12% 11.3%
10.3% 4%
10% 3.9%
8.0%
8% 3%
3.0%
6% 2%
4%
1% 1.3%
2%
0.7%
0% 0%
Italy Ireland Japan Spain Sweden UK US
2008-16 2008-16 1993-2005 2008-16 1991-96 2008-14 2008-14 BKIA BKT BBVA CABK SAB SAN
Chart 10: We expect CaixaBank to soon sell its stake in BFA… Chart 11: …yet a sale would not generate much value
Kwanza to US Dollar exchange rate (official and parallel) BFA P/NAV multiple versus potential dividend as a % of market cap
600 5%
Official exchange rate
500 Parallel exchange rate 4%
Capital return as % of mkt cap
3%
400
2%
300
1%
200
0%
100
-1%
0 -2%
Jun-17
Dec-17
Jun-13
Dec-13
Jun-16
Dec-16
Jun-12
Dec-12
Jun-14
Dec-14
Jun-15
Dec-15
6
Banking
After eight years of revenue declines, resulting from private sector deleveraging and falling
interest rates, the key debate among investors in Spanish banks has switched towards the
scope for revenue growth. Spanish banks are typically regarded as being among the biggest
beneficiaries of rising interest rates, while investors remain hopeful that loan volumes are
now at an inflection point, with future growth aided by real GDP growth of 2-3%.
We remain sceptical that banks will be able to deliver on such high expectations. Yet before
expanding on why we believe this, we first look to quantify the extent to which revenue-led
EPS growth is already captured in current valuations. Our starting point is to compare
banks’ current P/E multiples with a “normalised” multiple; we assume a one-year forward
P/E of 10x. This is consistent with history: DataStream’s European bank index’s P/E has
averaged 10.5x since 1987 (Figure 1).
Figure 1: European banks have typically traded on 10x one-year forward P/E
European and Spanish banks – one-year forward P/E
25x EU banks
Spanish banks
LT avg.
20x
15x
10x
5x
0x
87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17
Source: Berenberg research, Datastream
We are often challenged on this assumption, with many arguing that banks should trade
on a higher multiple. Such arguments typically reflect on: i) the scope for earnings
upgrades; ii) a lower interest rate environment/discount rate; and iii) P/E multiples across
the whole market have stretched. We outline our pushbacks to the first two issues below.
● The scope for earnings upgrades: Many argue that as consensus EPS estimates appear
to have stabilised, and are expected to expand as interest rates rise, investors should be
willing to pay a premium, above 10x. This was the experience for the US regional banks,
where multiples expanded to reflect likely EPS upgrades. We do not disagree with this,
especially given that any earnings benefits are likely to be beyond 2020 (as per the
banks’ own guidance). However, our framework is designed to establish what EPS
uplift is already priced in. Whether you value pre-2020 earnings on a higher multiple or
post-2020 earnings on a typical multiple (ie 10x) is a moot point, in our view.
● Lower discount rate is offset by lower inflation: Many in the market argue that the
decline in sovereign bond yields (and thus the “risk-free rate”) should cause the cost of
equity of European banks to fall. We believe that this simplistic interpretation of the
capital-asset pricing model is wrong, and ignores the relationship between P/Es and
inflation rates. To the extent that bond yields have fallen in tandem with inflation
expectations, then the long-term nominal growth rate for earnings will also have fallen
(assuming no change in the real growth rate), cancelling out the effect.
7
Banking
It is also worth noting that the only period for which European banks sustainably traded
above a 10x P/E multiple was between 1996 and 2001. This coincided with a period of sharp
reductions of European interest rates ahead of the convergence of monetary policy and
formation of the euro in January 1999. Indeed, the spread between Spanish and German 10-
year government bonds fell from 500bp in April 1995 to 20bp in April 1998 (Figure 2a). We
find this somewhat ironic given that the market is now hopeful that rising rates will deliver
multiple expansions. As shown in Figure 2b, the subsequent rise in bank earnings was
substantial.
Figure 2: Economic convergence across the eurozone justified abnormally high P/Es in the late 1990s
Spread between Spanish and German 10-year government bonds and indexed bank earnings (as measured by P/E deflated by price index)
a) Spread between Spanish and German 10-year government bonds b) EU and Spanish banks one-year forward EPS (Jan 1999 = 100)
7% 200
EU banks
6% 180 Spanish banks
160
5%
140
4% 120
3% 100
2% 80
60
1%
40
0% 20
-1% 0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Source: Berenberg research, Datastream
We thus regard the period of 1996-2001 to be an anomaly and note that the average P/E
excluding this period was 9.7x. It is also worth noting that during the bull market of 2003-
2007 banks traded on a P/E multiple of 11x.
Figure 3: Domestic Spanish banks require 40% consensus EPS upgrades to justify current valuation
Required change in consensus such that banks trade on 11x 2017 EPS, 10x 2018 EPS or 9x 2019 EPS
Implied net income if PE … Consensus net income Required uplift in consensus EPS current consensus P/E
Market Cap 11.0x 10.0x 9.0x as at January 2017
January 2017 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019
EURbn EURm EURm EURm EURm EURm EURm % % % x x x
Bankia 13.4 1,218 1,340 1,489 837 863 964 45% 55% 55% 16.0x 15.5x 13.9x
Bankinter 7.6 691 760 844 464 508 560 49% 50% 51% 16.4x 15.0x 13.6x
BBVA 49.7 4,518 4,970 5,522 4,021 4,189 4,566 12% 19% 21% 12.4x 11.9x 10.9x
CaixaBank* 25.6 2,327 2,560 2,844 1,787 2,067 1,929 30% 24% 47% 14.3x 12.4x 13.3x
Sabadell 10.5 955 1,050 1,167 793 830 982 20% 26% 19% 13.2x 12.6x 10.7x
Santander 95.5 8,682 9,550 10,611 6,440 7,568 8,480 35% 26% 25% 14.8x 12.6x 11.3x
Average Domestic 3,881 4,268 4,434 36% 39% 43% 15.0x 13.9x 12.9x
Average BBVA/SAN 24% 22% 23% 13.6x 12.2x 11.1x
Source: Berenberg research, Bloomberg
Note 1: We have adjusted consensus to account for AT1 expense, typically excluded from reported net income figures
Note 2: Asterisk denotes that we have adjusted CaixaBank’s 2019 consensus net income to remove income from BFA
and Repsol, which we argue will be sold within the next two years (see page 34).
8
Banking
6 1.3%
Jan-…
Jul-11
Jul-13
Jul-16
Jan-10
Jul-10
Jan-12
Jul-12
Jan-14
Jul-14
Jan-15
Jul-15
Jan-17
Jul-17
Jan-11
Jan-13
Jan-16
Jan-11
Jul-11
Jan-13
Jul-13
Jan-16
Jul-16
Jul-10
Jan-12
Jul-12
Jan-14
Jul-14
Jan-15
Jul-15
Jan-17
Jul-17
We likewise see limited scope for consensus loan losses to fall from cyclical lows, as argued
on page 25.
NII must rise 25%, discounting significant benefits from rising rates
With Spanish banks unlikely to reduce absolute costs and for loan losses to fall further, in
our view, the required EPS upgrades must thus come from revenue growth. This statement
is unlikely to provoke controversy, yet the required uplift is significant. Our analysis shown
in Figure 5 suggests that 15% revenue upgrades may be required for the domestic Spanish
banks, equivalent to NII upgrades of 25%. This is in line with many of the banks’ quoted
sensitivity to a 100bp parallel shift in the yield curve, as shown in the quote below.
“If rates were to rise by 100 basis points in one shot, something that will not
happen, fortunately, because it would have unintended consequences… NII
will grow between around 14-15% and 20% [in the second year]. That will
depend also on the behaviour of site deposits, to what extent those site
deposits migrate again into time deposit. This is why we give a range.”
Javier Pano, CaixaBank CFO (April 2017)
The majority of investors we speak to regard interest rate sensitivity as a “free option” for
Spanish banks (ie banks are fair valued even without this benefit). However, our analysis
suggests that share prices already discount a significant benefit from rising rates, which we
regard as very much a “blue-sky” scenario. We have long argued that such guidance hinges
on unrealistic assumptions and, crucially, the output of this regulatory exercise hinges on
banks’ own estimates (such as stickiness of deposits). There is little transparency, and these
are subject to change. In the following section, we outline why we believe investors, and
the banks themselves, overestimate the potential benefits of rising interest rates.
9
Banking
Figure 5: Assuming costs and loan losses do not rise, NII must grow 25% and revenues by 15%
Required change in consensus such that banks trade on 11x 2017 EPS, 10x 2018 EPS or 9x 2019 EPS
a) Required uplift in NII
Required uplift in PBT Consensus NII Required % increase in NII
in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019
EURm EURm EURm EURm EURm EURm % % %
Bankia 544 682 750 1,973 2,221 2,332 28% 31% 32%
Bankinter 324 360 406 1,054 1,088 1,155 31% 33% 35%
BBVA 710 1,116 1,366 17,595 18,049 18,748 4% 6% 7%
CaixaBank 772 704 1,308 4,712 4,842 5,064 16% 15% 26%
Sabadell 231 314 264 3,831 3,812 3,945 6% 8% 7%
Santander 3,203 2,831 3,044 34,307 35,637 36,908 9% 8% 8%
Average Domestic 20% 22% 25%
Average BBVA/SAN 7% 7% 8%
b) Required uplift in total income
Required uplift in PBT Consensus total income Required % Increase in TI
in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019
EURm EURm EURm EURm EURm EURm % % %
Bankia 544 682 750 3,048 3,294 3,444 18% 21% 22%
Bankinter 324 360 406 1,840 1,909 2,010 18% 19% 20%
BBVA 710 1,116 1,366 25,023 25,326 26,277 3% 4% 5%
CaixaBank 772 704 1,308 8,212 8,439 8,764 9% 8% 15%
Sabadell 231 314 264 5,703 5,165 5,300 4% 6% 5%
Santander 3,203 2,831 3,044 48,239 49,917 51,602 7% 6% 6%
Average Domestic 12% 13% 15%
Average BBVA/SAN 5% 5% 6%
Source: Berenberg research, Bloomberg
10
Banking
Figure 6: If we assume an 11x one-year forward P/E, NII must rise 15-20% to deliver the required 30% EPS upgrades
Required change in consensus such that banks trade on 12x 2017 EPS, 11x 2018 EPS or 10x 2019 EPS
a) Required change in consensus such that banks trade on 12x 2017 EPS, 11x 2018 EPS or 10x 2019 EPS
Implied net income if PE … Consensus net income Required uplift in consensus EPS current consensus P/E
Market Cap 12.0x 11.0x 10.0x as at January 2017
January 2017 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019
EURbn EURm EURm EURm EURm EURm EURm % % % x x x
Bankia 13.4 1,117 1,218 1,340 837 863 964 33% 41% 39% 16.0x 15.5x 13.9x
Bankinter 7.6 633 691 760 464 508 560 36% 36% 36% 16.4x 15.0x 13.6x
BBVA 49.7 4,142 4,518 4,970 4,021 4,189 4,566 3% 8% 9% 12.4x 11.9x 10.9x
CaixaBank* 25.6 2,133 2,327 2,560 1,787 2,067 1,929 19% 13% 33% 14.3x 12.4x 13.3x
Sabadell 10.5 875 955 1,050 793 830 982 10% 15% 7% 13.2x 12.6x 10.7x
Santander 95.5 7,958 8,682 9,550 6,440 7,568 8,480 24% 15% 13% 14.8x 12.6x 11.3x
Average Domestic 3,881 4,268 4,434 25% 26% 29% 15.0x 13.9x 12.9x
Average BBVA/SAN 13% 11% 11% 13.6x 12.2x 11.1x
11
Banking
The outlook for banking revenues lies at the centre of the debate among investors. As
concerns over capital levels and asset quality have receded over recent years, the debate
has shifted away from bank balance sheets to their P&L. We have long held the view that
this P&L focus is misplaced. Due to the leverage embedded in banks’ business models,
balance sheet certainty is of far greater importance to the value of shareholder equity than
the profits generated over the next two or three years.
In this section, we revisit the outlook revenues across the Spanish banks. A key appeal for
investors in European banks (in particular those in Spain) is their perceived gearing into
rising interest rates. We briefly explore the outlook for interest rates before arguing that
revenues are likely to disappoint the high expectations outlined in the previous section.
In particular, we argue that there are structural reasons why Spanish and European banks’
deposit betas will be higher than those experienced by the US banks at the start of the US
tightening cycle. Meanwhile, further headwinds come from expiry of the TLTRO II funding
from 2020, just as banks are expected to begin to realise the benefit of rising interest rates.
We see it as unlikely that banks will be able to increase NII by 25% from the current 2019
consensus estimates, which forms a key part of our negative view on the domestic Spanish
banks.
50 30
25
40
20
30
15
20
10
10 5
0 0
2006
2008
2009
2013
2016
2006
2008
2009
2013
2016
2010
2012
2010
2012
2014
2015
2014
2015
2007
2017
2007
2017
2011
2011
Throughout 2017, interest rate expectations ebbed and flowed. In the first half, the market
regarded a 2018 ECB rate rise as a done deal. The market-implied probability of the ECB
raising its deposit rate by end-2018 (as determined by Bloomberg’s option pricing data)
was approximately 90% (Figure 8a). Yet this probability fell significantly in the second half,
before rising again following more hawkish commentary from policy makers. Yet we find it
interesting to note that Euribor expectations remain at similar levels to mid-2016, when EU
banks were at all-time relative and absolute lows (Figure 8b).
12
Banking
Figure 8: The expected pace of ECB tightening has ebbed and flowed over the last year, but Euribor expectations remain low
Market implied European interest rate expectations
a) Implied probability of an ECB deposit rate hike by end-2018 b) Implied 12m Euribor curve
100% 6%
2017
90% 2018
5%
80% 2019
70% 4% 2020
60%
3%
50%
40% 2%
30% 1%
20%
10% 0%
0% -1%
May-17
Jun-17
Jul-17
Aug-17
Sep-17
Dec-17
Jan-18
Oct-17
Nov-17
Jul-17
Jan-11
Jul-11
Jan-13
Jul-13
Jan-16
Jul-16
Jan-10
Jul-10
Jan-12
Jul-12
Jan-14
Jul-14
Jan-15
Jul-15
Jan-17
Source: Berenberg research, Bloomberg
Figure 9: Yield curves show how reflationary hopes ebb and flow post-crises…
Yield curve, 10-year minus two-year government bonds (bp); japan data lagged 16 years (2006 = 1990)
US, UK and Germany versus Japan
350 US
300 UK
Germany
250 Japan
200
150
100
50
0
-50
-100
-150
1990 1995 2000 2005 2010 2015 2020 2025 2030
Source: Berenberg research, Datastream
13
Banking
Figure 10: …we expect this to continue, while deflationary pressures dominate over the longer term
Yield curve, 10-year minus two-year government bonds (bp); japan data lagged 16 years (2006 = 1990)
France, Italy and Spain versus Japan
350 France
300 Italy
Spain
250 Japan
200
150
100
50
0
-50
-100
-150
1990 1995 2000 2005 2010 2015 2020 2025 2030
Source: Berenberg research, Datastream
Yield curves are one, although imperfect, way to capture the inflationary/deflationary
debate. Focusing on the two-year/10-year spread removes some of the noise from central
bank policy changes. As shown in Figures 9 and 10, the yield curve on this measure ebbs
and flows post-crisis. Indeed, Europe, the US and the UK seem to be following the path of
Japan both in the immediate five-year period pre-crisis as well as the decade post-crisis.
If our analysis is correct, and if Japan remains a valid guide, we would expect the yield
curve to go through short, sharp periods of steepening, but ultimately to slowly flatten; 10-
year yields are, after all, effectively discounted forecasts and we believe interest rates will
be lower for (a lot) longer.
14
Banking
“If I look at our cumulative beta over the last couple of years just on interest-
bearing deposits, it’s 17%. And we think it is going to continue to nudge up a
little bit over time. So we’re not sure exactly what it’s going to be, but we’re
modelling something into the 20s now.”
Aleem Gillani, CFO of SunTrust Banks (October 2017)
“We’ve had very artificially low rates… We basically ate all that ourselves, and
some effect of the financial system is just taking part of that back. We do
expect more normalisation of beta, and beta has gamma. And so the first so
many basis points – 25 basis points is zero, the next 25 basis points might be
a couple percent, the next 25 might be 10%, then 30%…We expect it to be
higher than in the past… because it’s easier to move money… I don’t know if
it’s going to happen the next 25 basis points or the 25 after that, but
eventually you’re going to have more beta being passed on.”
Jamie Dimon, CEO and chairman of JP Morgan (September 2017)
Figure 11: US banks’ deposit betas have been low in early rate rises, but are expected to rise
JP Morgan – estimated deposit beta of the current rate cycle versus 2004 (February 2017)
Source: JP Morgan
15
Banking
Figure 12: US banks have widespread excess deposits, while this is not the case in Europe
Cumulative share of deposits as ranked by loan-to-deposit ratio, US versus EU banks
a) US banks b) European banks
100% 100%
90% 90% 52% of deposits
are with banks
Cumulative share of deposits
16
Banking
It could also be argued that demand for UK deposits is being increased by the presence of
the challenger banks. However, that the incumbent banks have maintained a wide gap in
funding costs may suggest UK challengers are not significantly impacting pricing of larger
incumbents. The motivation for passing on the recent rate rise in full may thus be driven
by reputational issues.
Figure 13: Spain has fewer banks with excess deposits relative to the UK market
Cumulative share of deposits as ranked by loan-to-deposit ratio, Spanish versus UK banks
a) Spanish banks b) UK banks
100% 100%
90% 90% 51% of deposits
Cumulative share of deposits
17
Banking
Figure 14: That most bank lending in Spain is floating rate may result in greater pressure to compensate depositors
Global banks – exposure to variable rate lending
a) Outstanding residential mortgages on variable rates (2013) b) Spanish banks – Floating rate lending as % of total new lending
70% 100%
90%
60%
80%
50%
70%
40% 60%
30% 50%
40%
20%
30%
10% 20%
0% 10%
Germany United Canada Japan United 0%
States Kingdom 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: Berenberg research, Bank of England, Bank of Spain
“As the behaviour of customers is a crucial input for banks’ interest rate risk
– especially for deposits – banks use behavioural models to better measure
and manage their interest rate risk. In that respect, the exercise revealed that
most deposit models are based solely on a period of decreasing interest rates
and hence might entail high model risk.”
ECB, Sensitivity Analysis of IRRBB – Stress test 2017 (October 2017)
“Only 7% out of €4.3trn of modelled deposits take into account the possibility
that deposit stability may decrease with an increase in interest rates.”
ECB, Sensitivity Analysis of IRRBB – Stress test 2017 (October 2017)
This is somewhat similar to modelling concerns for banks’ internal risk-weight models,
where due to lack of data history, too much weight is placed on the recent past, in our view.
This naturally raises questions about the confidence with which banks and their investors
can accurately gauge the NII benefits from rising interest rates. The sensitivity of outputs
to small changes in modelling assumptions can be demonstrated by BBVA’s decision to
revise down its interest rate sensitivity at FY 2016 results (this revised back to the original
estimate six months later).
“On 100 basis points increase, we’ll have a positive impact of around a little
below 10% in the euro balance sheet. This is significantly down from the
numbers that we shared with the markets at the end of the third quarter. We
are changing certain assumptions on the evolution – on the stickiness on
checking account and time deposits, taking into account the huge
movements that we’re seeing between both lines.”
Jaime Sáenz de Tejada, BBVA CFO (February 2017)
18
Banking
Figure 15: Most banks’ deposit models have only been calibrated in a period of falling rates
ECB presentation – Sensitivity Analysis of IRRBB – Stress test 2017 (October 2017)
Source: ECB
Figure 16: Banks were big buyers of Spanish and Italian four-year government bonds around the time of the TLTRO II auctions
Spanish and Italian four-year government bond yield
a) Spain b) Italy
1.0% 1.0%
TLTRO II auctions TLTRO II auctions
0.8% 0.8%
0.6% 0.6%
0.4% 0.4%
0.2% 0.2%
0.0% 0.0%
-0.2% -0.2%
Jul-17
Jul-17
Jan-16
Apr-16
Jul-16
Oct-16
Jan-18
Jan-16
Apr-16
Jul-16
Oct-16
Jan-18
Jan-15
Apr-15
Jul-15
Oct-15
Jan-15
Apr-15
Jul-15
Oct-15
Jan-17
Apr-17
Oct-17
Jan-17
Apr-17
Oct-17
With four-year Spanish government bonds yielding as high as 40bp during the TLTRO
auctions, the net carry on this trade may be c60bp for the Spanish banks, assuming that
banks invest only in Spanish government bonds. However, the spread is likely to be higher
as banks are also investing in other government bonds. For example, CaixaBank is also
19
Banking
using the TLTRO proceeds to invest in Italian government debt. We could therefore assume
the net carry to be 60-80bp. As this expires, this may decrease Spanish banks’ NII by c4%,
or EPS by 10-15% (Figure 17b).
Figure 17: The expiry of TLTRO II may reduce Spanish banks’ NII by 4% and EPS by 10-15%
TLTRO II impacts – select banks
a) Outstanding TLTRO II as a % of loans b) Impact on NII and EPS as TLTRO II unwinds
0% 5% 10% 15% 20% 30% 20% 10% 0% 10% 20%
BPM 18.6% BPM 8.5%
Sabadell 14.0% Intesa 26.7% 10.1% 5.7%
Intesa 13.5% BMPS 19.5% 5.6%
CaixaBank 12.8% UBI 17.2% 5.5%
UBI 12.6% Bankia 10.6% 4.7%
Bankia 12.5% CaixaBank 9.5% 4.5%
IFIS 11.7% Sabadell 16.1% 4.2%
UniCredit 10.5% UniCredit 9.2% 3.8%
Mediobanca 9.8% BPER 10.7% 2.8%
BMPS 8.7% Creval 9.0% 2.0%
BPER 7.9% Mediobanca 3.5% 1.9%
BBVA 5.7% IFIS 2.9% 1.3%
Creval 5.3% BBVA 3.8% 1.0%
Deutsche 2.4% Credem Impact on EPS 1.9% 0.8%
Credem 2.1% Deutsche Impact on NII 2.2% 0.6%
Source: ECB
g) Rising interest rates may impede fee growth over the longer term
Spanish banks, as well as European banks more broadly, have seen significant fee growth
over recent years as interest rates have fallen. Customers have switched savings products
20
Banking
into mutual funds, which attract significant entry fees for banks, as well as management
fees on top. Indeed, boosting fee income has become an increasing focus for banks as
interest rates have put downward pressure on banks’ net interest margins.
It is this natural to assume that as interest rates rise, customers will become more inclined
to switch bank into traditional savings products. This is likely to impede banks’ ability to
continue to grow their fee income, despite widespread expectations from investors and
bank management teams that this can provide additional revenue uplift over the coming
years.
This impact is unlikely to be felt immediately, with limited impact as interest rates first
begin to rise. However, investors must consider this dynamic when analysing longer-term
revenues and the sensitivity to normalising interest rates. That a large portion of banks’ fee
income is from entry fees means that this is likely to be very sensitive to the flow of AuM.
21
Banking
Spanish banks have experienced significant volume and margin pressure in both mortgage
and large corporate lending over recent years. This has been driven by weak loan demand,
low interest rates and strong investor demand for corporate debt. Banks have subsequently
sought to protect margins and revenues by growing in higher-risk lending (ie SME lending
and consumer credit). In this section we seek to analyse how this lending has been priced
and identify where banks may be taking excessive risks. We find pricing on SME lending to
be extremely competitive, while risk-adjusted consumer credit margins remain wide after
declining moderately since the height of the eurozone crisis.
In order to assess the extent of price competition in these markets, we have replicated a
framework first developed by the Bank of England and later adapted in our note UK banks:
crossing the Rubicon (dated 19 October 2017). We disaggregate the interest rate on banks’
new lending to account for the cost of funding, cost of capital and through-the-cycle loan
losses to calculate the residual for which banks must cover their operating expenses.
Figure 19: Risk-adjusted margins on SME lending have narrowed significantly as banks have competed on price
Spanish SME lending – composition of through-the-cycle loan pricing
a) Composition of through-the-cycle Spanish SME loan pricing b) Residual to cover expenses
10% Residual to cover expenses 2.0%
Long term loss rate
Cost of capital 1.5%
8% Cost of funding
Lending rate 1.0%
6%
0.5%
4%
0.0%
2%
-0.5%
0%
-1.0%
-2% -1.5%
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: Berenberg research, Bank of Spain, Bloomberg
Note: The decomposition shown is based on “Understanding the price of new lending to households”, BOE Quarterly Bulletin Q3 2010. We assume a 10% cost
of equity, a 100% average risk weight and a funding calculated by the average between our estimate of wholesale funding costs and the cost of new
deposits (we use this to account for the fact that banks competed strongly for deposits in the eurozone crisis). We assume a 1.5% through-the-cycle cost of
risk for SME lending.
Assuming a generous through-the-cycle loss rate of 1.5% (we assume Bankinter’s average loss
rate since 2003 due to a lack of other data), we estimate that interest rates on Spanish SME
lending must be 70bp higher to generate positive though-the-cycle returns (Figure 19). This
marks a three year period of aggressive price competition, reversing the widening of risk-
adjusted margins post the eurozone crisis (when outstanding corporate loan volumes were
falling c15% pa). When analysing the absolute level of this risk-adjusted margin, it is worth
considering that SME businesses will generate fee income from non-lending activities, with
the broader customer relationship arguably more important than for retail products.
In Figure 20, we replicate this analysis for both mortgage lending and consumer credit. Risk-
adjusted margins on new mortgage lending have risen since 2016, driven by lower funding
costs and higher-margin fixed-term lending supporting new lending yields. Yet back-book
margins have fallen, driven by lower rates and a large stock of Euribor-linked lending.
Risk-adjusted margins on consumer credit have narrowed over recent years, yet remain
relatively wide and in line with their historical average. Pricing discipline in this segment
thus appears to have been maintained.
22
Banking
Figure 20: Banks seem more disciplined when pricing mortgages and consumer credit
Spanish mortgage lending and consumer credit – composition of through-the-cycle loan pricing
a) Mortgages b) Consumer credit
10% Residual to cover expenses 16% Residual to cover expenses
Long term loss rate Long term loss rate
Cost of capital 14% Cost of capital
8% Cost of funding Cost of funding
Lending rate 12% Lending rate
6%
10%
4% 8%
6%
2%
4%
0%
2%
-2% 0%
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
2.0% 7.0%
1.5% 6.0%
5.0%
1.0%
4.0%
0.5%
3.0%
0.0%
2.0%
-0.5%
1.0%
-1.0% 0.0%
03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: Berenberg research, Bank of Spain, Bloomberg
Note: For mortgages we assume a 35% risk weight and through-the-cycle losses of 40bp (based on guidance from Bankia), while for consumer credit we
assume a 100% risk weight and 200bp through the cycle losses (Bankinter’s regulatory expected losses are 150bp, as per its Pillar 3 disclosures).
It thus appears that SME lending has the largest scope for risk-mispricing, while pricing of
consumer credit appears reasonable versus history. This analysis broadly supports banks’
strategies of increasing exposure to consumer credit (sector-wide volumes are growing 4%
yoy), while more caution is perhaps merited for those seeking to grow in SME lending.
While the pursuit of growth in consumer credit thus appears rational, our concerns are
twofold. First, we question the extent to which the pick up in loan demand may be driven
by the post-crisis replacement cycle. Having put off spending during the crisis, near-term
growth may prove unsustainable as there is a certain degree of consumption that is one-off
in nature (eg households replacing cars or white goods). Second, we believe the market is
giving banks the benefit from NII, without factoring in the impact of higher loan losses as
the lending seasons (we discuss asset quality in greater detail in the following section). This
risk was highlighted in the Bank of Spain’s latest Financial Stability Report.
“This type of credit [consumer credit] is one of the most profitable business
segments and that which grew most in year-on-year terms. The persistently
low profitability faced by banks may have induced them to seek higher
profits recently at the cost of running higher risks. The upsurge in
nonperforming loans of banks generally may be a sign of this higher risk.
Attention will have to be paid to these developments in the coming months.”
Bank of Spain, Financial Stability Report (November 2017)
23
Banking
Figure 21: SME lending accounts for c25% of bank lending, while consumer credit accounts for c15%
Spanish banks – breakdown of outstanding stock of lending by segment
Oustanding volumes Composition of outstanding volumes yoy % change
Mortgage Consumer SME Large Private Mortgage Consumer SME Large Mortgage Consumer SME Large
household household corporate corporate sector household household corporate corporate household household corporate corporate
EURm EURm EURm EURm EURm % % % % % % % %
Jun-14 589 179 354 308 1,429 41% 13% 25% 22%
Jun-15 561 174 315 302 1,351 42% 13% 23% 22% -5% -3% -11% -2%
Jun-16 541 179 300 290 1,310 41% 14% 23% 22% -4% 3% -5% -4%
Jun-17 526 184 314 256 1,280 41% 14% 25% 20% -3% 3% 5% -12%
Figure 22: CaixaBank appears to be taking on more risk that its peers
Spanish NII and gross loans – 9m 2017 versus 9m 2017, yoy change
a) NII b) Gross loan volumes (average balances)
8% 6%
6.1%
6% 5.4%
4.0%
4%
4%
BBVA
BKIA
SAN
LBK
UNI
2% 0.6% 2%
CABK
BBVA
BKIA
SAN
SAB
LBK
UNI
0%
CABK
SAB
BKT
-2% 0%
BKT
-4%
-3.7% -2% -0.9%
-6% -4.4% -1.3% -1.5% -1.5%
-6.1% -2.3%
-8%
-4%
-10%
-4.5%
-10.1% -5.1%
-12% -10.7% -6%
Source: Berenberg research, company data
Yet while NII estimates have increased as a result, loan loss estimates have also fallen. The
current consensus models loan losses to remain broadly flat until 2020. While this lending
will typically take c18 months to begin to season, this should lead to higher loan losses in
outer years. We estimate that through-the-cycle loan losses may increase by up to 10% over
a four-year period.
24
Banking
Despite widespread expectations of rising interest rates, the majority of investors expect
Spanish banks’ impairments to fall over the coming years, from already low levels. We are
sceptical. Spanish banks must address widespread forbearance, in our view, with further
losses on non-performing assets. Before expanding in detail, we outline our views below.
● Spain’s banking losses are smaller than other countries: The losses experienced by the
Spanish banks since the onset of its banking crisis began have lagged those in Ireland,
Japan, Sweden and even Italy, where forbearance concerns are extreme.
● We find evidence of significant forbearance in Spain: EBA data shows that the Spanish
banks have high levels of forbearance relative to other European countries. This backs
up research that shows Spain is among the largest offending countries in supporting
“zombie firms” whose survival is predicated on unsustainably cheap bank funding.
● Faster real estate disposals are positive, but there is risk of losses: With regulators
demanding faster disposals of non-performing assets, we believe banks will seek more
wholesale transactions. Banks who have so far relied on selling in retail markets (eg
CaixaBank) may have to accept larger discounts.
Figure 23: Spanish banks’ cumulative impairments have lagged those incurred during other banking crises
Total impairments over crisis as % of pre-crisis lending, by country and across the major Spanish banks
a) By country over their respective banking crises b) By bank in Spain since 2010 (ie 2011-16 impairments)
20% 18.1% 18.2% 30%
18% 15.9% 24.7%
16% 25%
14% 13.0%
11.3% 20%
12% 10.3%
10% 8.0% 15% 12.9%
8% 11.0%
10% 8.6%
6% 7.2%
6.1%
4% 3.5%
5%
2%
0% 0%
Italy Ireland Japan Spain Sweden UK US
2008-16 2008-16 1993-2005 2008-16 1991-96 2008-14 2008-14 BKIA BKT BBVA CABK POP SAB SAN
Source: Berenberg research, company data, OECD, various central banks
Note: We have adjusted Sabadell to take into account the acquisition of CAM in 2012; BBVA and Santander shows only their Spanish businesses
25
Banking
Figure 24: The pace of loss recognition has varied across banking crises, with Spain somewhere between Japan and Sweden
Cumulative loan losses during respective banking crises (indexed to zero at start of crisis) – select countries
a) Italy (2007-16) b) Japan (1993-2005)
25% Cumulative loan losses 25%
Cumulative loan losses
Linear progression in crisis Linear progression in crisis
20% Assuming 2011 starting point 20%
15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
96 98 00 02 04 06 08 10 12 14 16 90 92 94 96 98 00 02 04 06 08 10
c) Spain (2007-16) d) Sweden (1991-96)
25% 25%
Cumulative loan losses
20% Linear progression in crisis 20%
Assuming 2011 starting point
15% 15%
10% 10%
-5% -5%
96 98 00 02 04 06 08 10 12 14 16 86 88 90 92 94 96 98 00 02 04 06
e) UK (2007-14) f) US (2007-14)
25% 25%
Cumulative loan losses Cummulative loan losses
Linear progression in crisis 20% Linear progression in crisis
20%
15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
96 98 00 02 04 06 08 10 12 14 16 96 98 00 02 04 06 08 10 12 14 16
Source: Berenberg research, Bank of England, Bank of Japan, Bank of Spain, FDIC, OECD, Peter Englund – the Swedish banking crisis: roots and
consequences
Note: Labels mark year-end dates, UK data unavailable prior to January 2004, US data prior to January 2001 is not shown to preserve scale
26
Banking
The aggregated losses of the Spanish banks is significantly lower that experienced by the
Irish and Swedish banks in their respective crises, where losses totalled 18% of pre-crisis
lending. Similarly, Japanese banks’ aggregated losses were 60% higher than those of the
Spanish banks, totalling 16% of pre-crisis lending. That Spain lags Italy is likely to surprise
many, especially given widespread concerns about Italian asset quality and forbearance
issues.
Spanish losses appear broadly in line with the experience of the US banks. Yet as a large
proportion of US subprime mortgages were securitised, much of the losses were borne by
non-banks early into the crisis (eg via AIG’s $180bn bail out). Our data may thus understate
the scale of losses in the US, as well as the pace at which they were taken.
While expected losses will clearly depend on the nature of the crisis, mix of lending and the
loan terms, we find it instructive that Spain has lagged peers. Our concern about
forbearance across Spain is supported by EBA data on forborne lending that is considered
performing (Figure 26), as well as a number of academic papers on the impact of bank
lending to zombie firms. As an example of the latter, Figure 25 shows Spain has the second
highest share of capital sunk into zombie firms. While this data is taken at 2013 (more
recent data is unavailable), we suspect banks’ forbearance strategies will not have cut this
materially.
12% 15%
8%
10%
4%
5%
0%
UK
Korea
Austria
Sweden
Lux'bourg
Finland
Portugal
France
Italy
Belgium
Germany
Slovenia
Spain
0%
2010
2013
2010
2013
2010
2013
2010
2013
2010
2013
2010
2013
2010
2013
2007
2007
2007
2007
2007
2007
2007
In Figure 24, we plot the evolution of losses in their respective crises. As well as considering
the magnitude, it is interesting to note the pace of losses during the crisis (as measured by
the gradient). This helps demonstrate the choices that governments and bank management
teams have taken in order to deal with their asset-quality issues. For Spain and Italy we
show the linear progression line from both end-2007 and end-2010 as the start date of the
respective crises is somewhat debateable. Our key takeaways are as follows.
● Italy appears to be following the path of Japan: The Japanese banking crisis was
marked by extended forbearance. Banks falsely hoped that a cyclical recovery would
restore customers’ ability to service and repay their debts. However, extended deflation
led to nominal income growth substantially below what the household or corporate had
budgeted for when they took the debt on. Italy appears to be following this path, with a
consistent pace of loan losses, as was the case in Japan. Rather than taking steps to
address these issues quickly, policy makers and bank management teams appear to be
hoping that a cyclical recovery can help avoid crystallising hidden loan losses.
● Spanish policy falls between that of the Sweden and Japan: When looking at the pace
of Spanish losses, it seems that the policy response lies somewhat between that of
Japan and Sweden. The pace of losses increased during the onset of the global financial
crisis and then accelerated early into the eurozone crisis. This reflects the creation of
SAREB, with losses taken as assets were transferred. Although on a smaller scale, this
was similar to the experience in Sweden where losses were taken quickly and banks
were recapitalised. Yet losses have since remained high, with banks repeatedly raising
equity or selling assets to take further write-downs on their bad debts. Figure 27 shows
Spanish banks have consistently failed to beat market expectations on loan losses.
27
Banking
We thus believe the extent of forbearance in Spain (and Europe more broadly) means that
market participants have misplaced confidence in banks’ balance sheets. Below we quote
an extract from the Bank of England’s Financial Stability Report discussing the impact of
forbearance, and difficulty that outsiders have in assessing true balance sheet risk.
“Forbearance can disguise credit risk on banks’ balance sheets. If
widespread, it would mean that data on loan arrears and write-offs give a
misleading picture of levels of borrower distress. And as lenders do not
comprehensively or consistently record or report forbearance, it is difficult to
know the extent of this distortion. As a result, the pricing of risk could
potentially be distorted and uncertainty about lenders’ future capital and
profit figures could be greater than it would otherwise be.”
Bank of England, Financial Stability Report (June 2011)
Figure 26: EBA data shows significant forbearance across the Spanish banks
Forborne loans – select European banks (H1 2017)
a) Performing forborne loan as % of gross loans b) Performing forborne loans as % of NPLs
0% 2% 4% 6% 8% 10% 12% 14% 0% 10% 20% 30% 40% 50% 60%
Bank of Ireland Swedbank
AIB DNB
Santander Handelsbanken
Bankia ING
Sabadell Santander
UBI Commerzbank
Jyske SEB
BCP ABN AMRO
BBVA BBVA
Monte Paschi Barclays
ABN AMRO Jyske
CaixaBank Bankia
BPI Sabadell
Intesa Bank of Ireland
Commerzbank Bankinter
Liberbank Nordea
Bankinter Mediobanca
DNB BPI
UniCredit CaixaBank
Mediobanca Danske Bank
RBS Lloyds
KBC AIB
Credito Emiliano RBS
Nordea Erste
Lloyds UBI
ING Deutsche Bank
Erste Credit Agricole
BNP Intesa
Credit Agricole HSBC
Swedbank KBC
Danske Bank Monte Paschi
SEB BCP
Barclays Credito Emiliano
HSBC Liberbank
Deutsche Bank UniCredit
SocGen BPM
Sydbank Performing forborne loans BNP
Handelsbanken Non-forborne restructured loans SocGen
28
Banking
Figure 27: Perma-disappointment: since the crisis, Spanish banks have never beaten on loan losses
Domestic Spanish banks – cost of risk estimates by fiscal year
a) Impairments (€bn) b) Impairments as a % of net loans
10 1.8%
2012
9 2013 1.6% 2012
8 2013
1.4%
2014 2014
7 1.2%
2016 2015
6 2015 1.0% 2016
5 2017 2011 2017
2011 0.8%
4
0.6%
3 2019
2018 0.4% 2018 2019
2
0.2%
1
0.0%
0
Jul-14
Jul-15
Jan-17
Jul-17
Jan-11
Jul-11
Jan-13
Jul-13
Jan-16
Jul-16
Jan-10
Jul-10
Jan-12
Jul-12
Jan-14
Jan-15
Jul-14
Jul-15
Jul-17
Jan-11
Jul-11
Jan-13
Jul-13
Jan-16
Jul-16
Jan-10
Jul-10
Jan-12
Jul-12
Jan-14
Jan-15
Jan-17
Figure 28: European banks continue to dilute investors via share issuance, while US banks dealt with these issues early
Banking sector market cap deflated by share price (a proxy for share count), indexed to 100 in January 2000
a) European banks b) US banks
250 250
200 200
150 150
100 100
50 50
0 0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18
Source: Berenberg research, Datastream
29
Banking
Figure 29: Exposure to foreclosed real estate remains large for many banks, in particular CaixaBank and Sabadell
Spanish banks exposure to foreclosed real estate
a) Outstanding stock of foreclose real estate (€bn) b) Spanish foreclosed real estate as % of assets (Q2 2017)
100 7% Post PE Sales
90 86 83 83 81 80 81 79 Pre PE sales
77 6% 6.5%
80
70 5% 5.7%
60
50 4%
40 3.9%
3%
30 3.0%
20 2%
10
0 1% 1.3%
H1 H2 H1 H2 0.7%
0%
2011 2012 2013 2014 2015 2016 2017 BKIA BKT BBVA CABK SAB SAN
Source: Berenberg research, company data
Note: For CaixaBank, we include foreclosed real estate that is used for rental, which is excluded from the bank’s disclosed figures; this is €3.1bn net of
provisions, which equates to €4.1bn gross assuming 25% coverage (in line with Santander’s rental assets)
While BBVA and Santander have used these transactions to significantly reduce exposures,
many other banks have sought to reduce exposures gradually by selling individual assets
rather than grouping them in wholesale transactions. Yet we expect banks to come under
greater pressure to accelerate NPA reductions via wholesale transactions, which require
larger discounts. We thus believe that banks’ earnings will be negatively impacted by such
losses over the coming years. This risk was highlighted last year by CaixaBank’s CEO.
“Our guidance was that we expect profits to exceed provisions or to at least
offset provisions… But you also should bear in mind that we still have a large
stock here. And there will be potentially opportunities to sell down stock over
the quarters with maybe a less attractive P&L impact, but a more attractive
sort of reduction for the balance sheet and going forward for the operating
expenses associated to it.”
Gonzalo Gortázar, CaixaBank CEO (April 2017)
30
Banking
Figure 30: Spanish banks have improved real estate coverage over recent years
Spanish banks – foreclosed real estate coverage since loan origination
BKIA BKT BBVA CABK POP SAB SAN
H1 2017 H1 2017 H1 2017 H1 2017 Q1 2017 H1 2017 H1 2017
EURm EURm EURm EURm EURm EURm EURm
Gross amount 5,503 498 14,409 15,073 17,700 11,052 27,321
Provisions 3,357 220 8,801 8,815 11,500 6,399 16,239
o/w haircuts & excess provisions n/a n/a 4,691 2,727 4,700 n/a 3,323
o/w accounting provisions 1,113 68 4,110 6,088 6,800 4,264 12,916
Net amount 2,146 279 5,608 6,258 6,200 4,653 11,082
Coverage ratio 61.0% 44.1% 61.1% 58.5% 65.0% 57.9% 59.4%
Source: Berenberg research, company data
Note 1: Santander is shown including Popular
Note 2: Sabadell used gains from asset sales in Q3 to book additional impairments; including these, Sabadell’s
coverage rises to c62%
Figure 31: Exposure by region does not appear to have been a big differentiator of changes in house prices
Spanish banks – weighted average decline in house prices from peak by region by bank
a) Weighted average decline by bank over time b) Weighted average decline by bank as at June 2017
0% 35%
-5% 30%
-10% 25%
-15% 20%
-20% 15%
-25% 10%
-30% 5%
-35% 0%
06 07 08 09 10 11 12 13 14 15 16 17 BKIA BKT BBVA CABK LBK POP SAB SAN UNI
Source: Berenberg research, company data, Ministerio de Fomento
31
Banking
Figure 32: While house prices in Catalonia and Madrid are rising faster than average, exposures are broadly similar
Spanish house prices and bank exposure by region
a) Average house price by region, yoy change b) Exposure to Catalonia and Madrid as % of total
20% 60%
National By branches By private sector credit risk
15% Catalonia
50%
Madrid
10%
40%
5%
30%
0%
20%
-5%
-10% 10%
-15% 0%
96 98 00 02 04 06 08 10 12 14 16 BKIA BKT BBVA CABK LBK POP SAB SAN UNI
Source: Berenberg research, company data, Ministerio de Fomento
9%
25% POP SAB
8%
POP
SAB 7%
BBVA
Peak NPA ratio
20%
6% CABK
15% CABK BKIA 5%
SAN BKIA
4%
10%
3%
BBVA
2% SAN
5% POP prior to
BKT 1% Blackstone JV
BKT
0% 0%
0% 10% 20% 30% 0% 10% 20% 30%
Impairments (NPL & RE) as a % of 2010 loan book Impairments (NPL & RE) as a % of 2010 loan book
Source: Berenberg research, company data
Note: We have adjusted Sabadell to take into account the acquisition of CAM in 2012
32
Banking
In Figure 34, we plot Spanish banks’ NPL coverage ratio against the ratio of balance sheet
loans that are secured. One would intuitively expect a negative correlation, with banks that
have a higher proportion of unsecured loans (and thus lower collateral values) taking
higher provisions against bad debt. On this basis, Sabadell stands out versus peers as
having the lowest ratio of secured assets to total assets, while its NPL coverage ratio is
below that of its similar peers (eg BBVA).
Figure 34: Sabadell may require higher coverage than some of its peers
Spanish banks – NPL coverage versus secured lending
80% stronger
post provisioning
75% SAN
70%
65%
NPL coverage
60% POP
ABA
BBVA BKIA
55% post
SUB CABK
50% UNI
pre SAB IBE
45% SAN BKT KAT
pre SAN
40% SUB
LBK
35% weaker
provisioning
30%
30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80%
Secured lending as % of total lending
Source: Berenberg research, company data
- Our price target is based on a P/TNAV derived from our 2019E RoTE and a
Bankia
CAPM-derived cost of equity
- Our price target is based on a P/TNAV derived from our 2019E RoTE and a
Bankinter
CAPM-derived cost of equity
- Our price target is based on a P/TNAV derived from our 2019 RoTE and a CAPM-
BBVA
derived cost of equity. We include a capital shortfall of €0.20 per share
- Our price target is based a hybrid of two methods. The first uses a P/TNAV
derived from our 2019E RoTE and a CAPM-derived cost of equity. The second
Caixabank
values the core bank in the same way, and adds the expected capital return to
shareholders, assuming the investment stakes are sold at current prices.
- Our price target is based on a P/TNAV derived from our 2019E RoTE and a
Sabadell
CAPM-derived cost of equity
- Our price target is based on a P/TNAV derived from our 2019 RoTE and a CAPM-
Santander
derived cost of equity. We include a €10bn capital shortfall, or €0.60 per share.
Source: Berenberg research
33
CaixaBank SA
Banking
34
CaixaBank SA
Banking
SELL
Investment thesis
● We believe that the market overestimates CaixaBank’s outer-year
22 January 2018 Reuters CABK.MC
NII expectations, with interest rates likely to remain lower for
Bloomberg CABK SM longer than most expect, and loan demand likely to remain weak.
Current price Price target
● While CaixaBank’s recent NII has outperformed peers’, this raises
Market cap (EUR m) 25,745 questions about the risk CaixaBank is taking, which should lead to
EUR4.31 EUR 2.75 higher loan losses as this lending seasons. Consensus loan losses
19/01/2018 Madrid Close EV (EUR m) - are unsustainably low, in our view.
26,605,25
Trading volume ● We welcome CaixaBank’s ambition to simplify its business, selling
0
Free float 60.0% down its investment stakes to focus on its core banking franchise,
yet this is likely to impede returns (the investment stakes are very
Non-institutional shareholders Share performance profitable), while market participants overestimate potential capital
return from the sales of the investment stakes.
Criteria Caixa: 40% High 52 weeks EUR 4.50
Low 52 weeks EUR 3.21 ● The market is wrong to assume that BFA’s earnings are held in
perpetuity, with CaixaBank openly seeking to sell this asset. BFA’s
Business description Performance relative to earnings make up 10% of 2019 consensus earnings, but selling at 2x
CaixaBank is a retail bank focused in Spain SXXP SX7P NAV would generate only 60bp of CET1 or 3.5% its market cap.
and with a presence in Portugal. It also 1mth 6.6% 4.7%
derives significant income from investment ● Our price target is based a hybrid of two methods. The first uses a
3mth 10.4% 7.8% P/TNAV derived from our 2019E RoTE and a CAPM-derived cost of
stakes in Erste, Repsol and Telefónica.
12mth 19.1% 18.1% equity. The second values the core bank in the same way, and adds
the expected capital return to shareholders, assuming the
investment stakes are sold at current prices.
Bullish sentiment for the Spanish banks appears extreme, in our view. Investors expect
rising European interest rates to deliver a material uplift in earnings, with this anticipated
to sustain further outperformance. CaixaBank is among the biggest consensus winners of a
European reflation trade, in our view. Yet with the bank now trading on 1.3x TNAV, and
with earnings flattered by unsustainable investment income, the shares already discount
core bank returns that are likely to prove unachievable, in our view.
To establish the share price-implied return of CaixaBank’s core bank, we replicate our
analysis from Figure 36 and deduct consensus estimates for the investment stakes as well
as our estimates for BPI (consensus is unavailable). While consensus models a 9% core
bank RoTE in 2019, our analysis suggests that the shares factor in returns of 11%, or 13% if
BFA and Repsol are sold as we expect (we explore this in more detail on page 39). This will
be hard to achieve, in our view, due to the headwinds to revenue growth previously
outlined in this note.
Figure 36: CaixaBank’s share price implies a 12-13% RoTE in the core bank
Consensus and market implied RoTE of CaixaBank’s core bank (ie ex BPI and investments), assuming a 10x one-year forward P/E
a) Consensus estimates b) Share price implied
10% 14%
If BFA & Repsol are sold
12% If no sale of BFA & Repsol
8%
10%
6%
8%
4% 6%
4%
2%
2%
0%
0%
-2% -2%
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Source: Berenberg research, Bloomberg, CaixaBank
Note: We calculate the earnings required for the bank to trade on a 10x one-year forward P/E and deduct from this earnings from the investment
stakes and BPI to estimate the required core bank earnings; we also show the earnings required if CaixaBank disposed of its stakes in BFA and Repsol
It is worth noting that a 13% core bank RoTE would be in line with consensus expectations
for Bankinter, the highest-quality and most profitable bank in Spain. Yet Bankinter’s
returns are flattered by Línea Directa, a highly profitable direct-distribution insurance
business that has generated a 30-35% RoE over the past few years. Adjusting for this, the
RoTE of the core banking business is 2.0-2.5% lower than the group returns. In other
words, the highest-quality bank in Spain (which trades on 1.8x TNAV) is expected to earn a
10-11% RoTE in its core bank. With a structurally higher cost base and a focus on growth
over risk/return, we believe it will be hard for CaixaBank to match this.
36
CaixaBank SA
Banking
Figure 37: Assuming costs and loan losses do not rise, NII must grow 25% and revenues by 15%
Required change in consensus such that banks trade on 11x 2017 EPS, 10x 2018 EPS or 9x 2019 EPS
a) Required uplift in NII
Required uplift in PBT Consensus NII Required % increase in NII
in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019
EURm EURm EURm EURm EURm EURm % % %
Bankia 544 682 750 1,973 2,221 2,332 28% 31% 32%
Bankinter 324 360 406 1,054 1,088 1,155 31% 33% 35%
BBVA 710 1,116 1,366 17,595 18,049 18,748 4% 6% 7%
CaixaBank 772 704 1,308 4,712 4,842 5,064 16% 15% 26%
Sabadell 231 314 264 3,831 3,812 3,945 6% 8% 7%
Santander 3,203 2,831 3,044 34,307 35,637 36,908 9% 8% 8%
Average Domestic 20% 22% 25%
Average BBVA/SAN 7% 7% 8%
37
CaixaBank SA
Banking
● CaixaBank’s high cost base creates a structural disadvantage: CaixaBank’s staff costs
are 30% higher than its peers, with an average cost per employee of €85k (Figure 38b).
Some argue CaixaBank’s inflated cost base is an opportunity for RoE improvement. Yet
CaixaBank’s ability to cut costs is overestimated by the market, in our view. It is likely to
remain a drag on returns for the foreseeable future.
Figure 38: Dad’s army… CaixaBank’s employees are more costly than peers’
Spanish banks – Average age, tenure and wage (2016)
a) Average employee age and tenure (years) b) Staff costs / number of employees (EUR thousands)
50 Avg. age (lhs) Avg. length of service (rhs) 20 90
18 85
45
16
80
14
40
12 75
35 10 70
8 65
30
6
60
4
25
2 55
20 0 50
BKIA BKT BBVA CABK POP SAB SAN BKIA BKT BBVA CABK POP SAB SAN
Source: Berenberg research, company data
Note 1: We show data for the average age and tenure of each bank’s Spanish business where available; For Santander, employee tenure is shown for the
group, while average age is for continental Europe; Bankinter’s data includes Portugal
Note 2: BBVA and Santander’s staff costs/number of employees is for Spain only
● Underlying cost growth of more than 3%: As a result of collective wage agreements for
former cajas, CaixaBank’s staff salaries (ex-bonuses) are due to rise by 3.0% in 2018,
with an additional 0.25% increase if the RoE is above 6%. Additional cost will come from
the growth-focused strategy that targets market share gains. CaixaBank will thus have
to work very hard just to keep costs flat (it targets growth of less than 1%).
● Redundancy costs are extremely high (and rising): As employees on overly generous
salaries have little incentive to leave, CaixaBank has to pay considerable costs for early
retirements. The cost per redundancy has typically ranged between €400k and €450k,
yet the trend has been rising. In Q2 2017, CaixaBank booked restructuring charges for
610 early retirements at a cost of €500k per person.
● Further restructuring is required: We believe that consensus (and market valuation)
underestimates the amount of restructuring that must take place, especially if revenues
disappoint as we expect. Considering the high costs of restructuring in Spain, this is
likely to be a drag on earnings and TNAV per share growth, in our view.
38
CaixaBank SA
Banking
We have long argued that the market overestimates the value of CaixaBank’s investment
stakes. This stems from little capital being allocated to these, meaning profitability is high
when income is considered into perpetuity. Yet this also means there is little capital benefit
to shareholders when the investment stakes are sold, while the impact to earnings is
typically very significant.
The assumption that this income is modelled into perpetuity is wrong, in our view. Indeed,
CaixaBank has sold down a large number of its investment stakes over recent years, and is
likely to continue to do so. We expect sales of both its 48% stake in the Angolan bank BFA
and its 10% stake in Repsol over the next 12 months. These may erode group earnings by up
to 20% with a negligible benefit to capital. This would leave CaixaBank trading on an
adjusted 2019 consensus P/E multiple of 13x.
1) BFA sale may cut 2019 EPS by 10% with only a 30bp CET1 benefit
We do not believe the strategic rationale for holding an Angolan bank is in keeping with
the risk tolerance of CaixaBank’s management, or its investors. Although it has generated
significant profit over recent years (eg a 38% RoE in 2016), there are significant risks. As
well as broader concerns over the economic backdrop in Angola, CaixaBank is taking on
significant FX risk.
Over recent years, depreciation of the Angolan kwanza has been a significant drag on
profits for BPI and CaixaBank, with the currency depreciating c50% versus the US dollar
since 2014. While this has been pegged to the dollar since mid-2016, the Angolan central
bank is in the process of moving away from this peg into a trading band. This will involve a
number of auctions, the first of which took place in January. Following a $100m sale, the
kwanza depreciated by c10%. We expect further declines over time.
The extent of this FX risk is demonstrated by IMF data showing the official exchange rate
versus the parallel black market rate (Figure 39). While IMF data runs to January 2017,
Bloomberg quote a black market exchange rate of 430 kwanza to the dollar as of January
2018. This compares to the official exchange rate of 183.
Figure 39: Angolan currency risk is a key risk for earnings and TNAV
Angola – inflation and FX depreciation
a) Angola CPI, yoy % change b) Kwanza to US Dollar exchange rate (official and parallel)
40% 600
Official exchange rate
Actual
35% Consensus 500 Parallel exchange rate
30%
400
25%
300
20%
15% 200
10% 100
5% 0
Jun-17
Dec-17
Jun-13
Dec-13
Jun-16
Dec-16
Jun-12
Dec-12
Jun-14
Dec-14
Jun-15
Dec-15
0%
10 11 12 13 14 15 16 17 18 19
Source: Berenberg research, Bloomberg, IMF
Note: IMF data for the parallel exchange rate is unavailable beyond January 2017, but Bloomberg quoted a black-market rate of 430 in January 2018
39
CaixaBank SA
Banking
These risks have resulted in the ECB issuing a non-binding recommendation for CaixaBank
to sell down its BFA stake. Below, we quote CaixaBank’s CEO discussing this issue on a
conference call in 2017.
“We have a non-binding recommendation from the ECB to reduce our stake
in BFA… We agree with the ECB that for us to own 48% in BFA not having
control is a level in which we shouldn’t be in the long term. And hence, we
will be working towards that objective. It will take some time. It’s a great
asset, but it has its own specificities. And hence, in the long term, our
expectation is that we will own less than 48%. What size and what speed is
difficult to forecast at this stage.”
Gonzalo Gortázar, CaixaBank CEO (April 2017)
When BPI/CaixaBank sold a 2% stake in BFA to Unitel (controlled by Isabel dos Santos), it
was reported to have agreed a price of €28m, valuing BFA at €1.4bn. This compares to a
book value of €1.1bn, on our estimates, before the recent 12% devaluation of the kwanza.
This would imply a P/NAV multiple of 1.3x. However, as the sale of this 2% stake passed
control from BPI to Unitel, this valuation factors in a control premium. The implied P/NAV
multiple may thus prove optimistic as BPI/CaixaBank seeks to sell a large minority stake.
We estimate that a sale at 1.3x NAV would benefit CaixaBank’s CET1 ratio by c30bp. If the
bank was to pay out a special dividend such that its CET1 was held flat (it was 11.7% at Q3),
this would equate to an 8c dividend per share, equivalent to 2% of CaixaBank’s market cap.
We flex these assumptions in Figure 40. Every 0.25x increase in the P/NAV multiple will
add c10bp to the potential CET1 gains. It is worth noting that this analysis has excluded any
impact from the devaluation of the kwanza in January – we estimate this will have a 10bp
drag to CaixaBank’s CET1 in Q1 2018.
Figure 40: Even assuming a high multiple on sale, the potential capital return from a sale of BFA is low
CaixaBank – estimated impact to CET1 and potential capital return from flexing the P/NAV assumption in a sale of BFA
a) P/NAV multiple versus benefit to CET1 b) P/NAV multiple versus potential dividend as a % of market cap
1.0% 5%
0.8% 4%
CET1 benefit to CaixaBank
0.6% 3%
0.4% 2%
0.2% 1%
0.0% 0%
-0.2% -1%
-0.4% -2%
0.0x 0.5x 1.0x 1.5x 2.0x 2.5x 0.0x 0.5x 1.0x 1.5x 2.0x 2.5x
BFA P/NAV multiple BFA P/NAV multiple
Source: Berenberg research
While the capital benefit from selling its stake in BFA is small, the impact to earnings is
likely to be significant. Despite management clearly indicating that it would like to sell this
stake quickly, consensus models BFA income out to 2020. Over the past few quarters, BFA
has contributed an annualised net income of €250m, equivalent to 10% of CaixaBank’s 2019
consensus net income.
40
CaixaBank SA
Banking
20
1.5x
15
1.0x
10
0.5x
5
0 0.0x
07 08 09 10 11 12 13 14 15 16 17 18 07 08 09 10 11 12 13 14 15 16 17 18
Source: Berenberg research, Datastream
We thus expect that a further 10% of earnings would be lost, with no capital benefit.
Combining both the sales of BFA and Repsol, this would leave CaixaBank trading on an
adjusted 2019 consensus P/E in excess of 13x. As per Figure 42, this valuation could only be
justified if CaixaBank’s earnings were to rise by c50% from the 2019 adjusted consensus.
Figure 42: Domestic Spanish banks require 40% consensus EPS upgrades to justify current valuation
Required change in consensus such that banks trade on 11x 2017 EPS, 10x 2018 EPS or 9x 2019 EPS
Implied net income if PE … Consensus net income Required uplift in consensus EPS current consensus P/E
Market Cap 11.0x 10.0x 9.0x as at January 2017
January 2017 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019 in 2017 in 2018 in 2019
EURbn EURm EURm EURm EURm EURm EURm % % % x x x
Bankia 13.4 1,218 1,340 1,489 837 863 964 45% 55% 55% 16.0x 15.5x 13.9x
Bankinter 7.6 691 760 844 464 508 560 49% 50% 51% 16.4x 15.0x 13.6x
BBVA 49.7 4,518 4,970 5,522 4,021 4,189 4,566 12% 19% 21% 12.4x 11.9x 10.9x
CaixaBank* 25.6 2,327 2,560 2,844 1,787 2,067 1,929 30% 24% 47% 14.3x 12.4x 13.3x
Sabadell 10.5 955 1,050 1,167 793 830 982 20% 26% 19% 13.2x 12.6x 10.7x
Santander 95.5 8,682 9,550 10,611 6,440 7,568 8,480 35% 26% 25% 14.8x 12.6x 11.3x
Average Domestic 3,881 4,268 4,434 36% 39% 43% 15.0x 13.9x 12.9x
Average BBVA/SAN 24% 22% 23% 13.6x 12.2x 11.1x
Source: Berenberg research, Bloomberg
Note 1: We have adjusted consensus to account for AT1 expense, typically excluded from reported net income figures
Note 2: Asterisk denotes that we have adjusted CaixaBank’s 2019 consensus net income to remove income from BFA
and Repsol, which we argue will be sold within the next two years)
41
CaixaBank SA
Banking
In Figure 43, we show our estimates for the changes to capital ratios (and subsequent
capital return) from sales of CaixaBank’s investment stakes at current market prices.
Known values are shown in blue and estimates are in red. An Excel file is available upon
request.
Figure 43: CaixaBank’s investment stakes are worth €0.25 per share if sold at the current prices
CaixaBank – estimated changes to capital ratios if stakes were sold at market prices (as at Q3 2017)
Financial stakes Industrial stakes Total
Erste BFA Telefonica Repsol
EURm EURm EURm EURm
Capital / RWAs
RWAs 149,448 149,448 149,448 149,448
CET1 capital 17,412 17,412 17,412 17,412
CET1 ratio 11.7% 11.7% 11.7% 11.7%
42
CaixaBank SA
Banking
Sep-13
Mar-16
Aug-16
Jan-12
Jun-12
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Jan-17
Jun-17
Apr-13
Nov-12
Nov-17
Mar-16
Aug-16
Jun-12
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Jan-17
Jun-17
Apr-13
Sep-13
Jan-12
Nov-12
Nov-17
Jul-14
Dec-14
May-15
Jan-17
Jun-17
Apr-13
Sep-13
Mar-16
Jan-12
Nov-12
Feb-14
Oct-15
Nov-17
Apr-13
Sep-13
Mar-16
Aug-16
Jan-12
Jun-12
Nov-12
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Jan-17
Jun-17
Nov-17
Mar-16
Aug-16
Jan-12
Jun-12
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Jan-17
Jun-17
Nov-17
Apr-13
Nov-12
Sep-13
Mar-16
Aug-16
Jan-12
Jun-12
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Jan-17
Jun-17
Nov-17
Apr-13
Nov-12
43
CaixaBank SA
Banking
Figure 45: We believe that the market is too hopeful on outer-year NII forecasts…
CaixaBank – RoE drivers by fiscal year, consensus estimates
a) Net interest income (€bn) b) NII / average net loans
5.2 2015 2.6% 2015
2016 2016
2017 2.5% 2017
5.0
2018 2.4% 2018
4.8 2019 2019
2.3%
4.6 2.2%
2.1%
4.4
2.0%
4.2
1.9%
4.0 1.8%
May-17
Sep-17
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
May-17
Sep-17
Jan-17
c) Net loans (€bn) d) Net loans, yoy change
240 2015 12% 2015
2016 2016
230 10% 2017
2017
2018 2018
8%
220 2019 2019
6%
210
4%
200
2%
190 0%
180 -2%
May-17
Sep-17
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
May-17
Sep-17
Jan-17
Jan-16
May-16
Sep-16
Jan-18
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
May-17
Sep-17
Jan-17
May-17
Sep-17
44
CaixaBank SA
Banking
Jan-16
May-16
Sep-16
Jan-18
May-13
Sep-13
May-16
Sep-16
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
May-17
Sep-17
Jan-17
May-17
Sep-17
Jan-13
Jan-16
Jan-18
c) PPOP (€bn) d) Loan loss charge (€bn)
4.4 2.2 2015
4.2 2.0 2016
2017
4.0 1.8 2018
2019
3.8 1.6
3.6 1.4
3.4 2015 1.2
2016
3.2 2017 1.0
3.0 2018 0.8
2019
2.8 0.6
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
May-17
Sep-17
Jan-17
May-17
Sep-17
Jan-16
May-16
Sep-16
Jan-18
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
Jan-17
May-17
Sep-17
45
CaixaBank SA
Banking
Berenberg estimates
Figure 47: Berenberg estimates
CaixaBank – summary forecasts
2010 A 2011 A 2012 A 2013 A 2014 A 2015 A 2016 E 2017 E 2018 E 2019 E 2020 E
EURm EURm EURm EURm EURm EURm EURm EURm EURm EURm EURm
Net interest income 3,418 3,170 3,872 3,955 4,155 4,353 4,157 4,743 4,778 4,818 4,910
Fee income 1,406 1,562 1,701 1,760 1,825 2,013 2,090 2,488 2,563 2,617 2,672
Trading income 258 343 455 679 640 867 848 309 250 220 220
Other income 1,796 1,436 709 -29 320 493 732 813 800 637 710
Total income 6,878 6,511 6,737 6,365 6,940 7,726 7,827 8,353 8,391 8,292 8,512
Personnel expenses
General expenses & amortisation
Total expenses -3,366 -3,342 -3,566 -4,786 -3,773 -4,606 -4,116 -4,615 -4,574 -4,647 -4,722
Financial asset impairment losses -2,225 -3,799 -4,041 -2,084 -1,593 -314 -941 -1,185 -1,199 -1,205
-2,102
Other provisions -332 -143 -288 -495 -923 -755 -950 -300 -80 -50
Other gains and losses 1 547 709 1,770 -386 34 -1,104 255 -150 -100 0
Pre-tax profits 1,411 1,159 -62 -980 202 638 1,538 2,103 2,182 2,266 2,535
Gains / losses on discontinued items
Income tax -199 -106 291 1,288 418 181 -482 -355 -394 -480 -547
Net income 1,212 1,053 229 308 620 819 1,056 1,747 1,787 1,786 1,988
Minorities 0 0 1 8 0 -5 -9 -49 -65 -32 -36
AT1 interest 0 0 0 0 0 0 0 -24 -76 -104 -104
Net attributable income 1,212 1,053 230 316 620 814 1,047 1,675 1,647 1,650 1,848
Number of shares (m) 3,348 3,964 4,353 5,077 5,603 5,793 5,778 5,978 5,978 5,978 5,978
EPS (€) 0.36 0.27 0.05 0.06 0.11 0.14 0.18 0.28 0.28 0.28 0.31
DPS (€) 0.20 0.18 0.16 0.13 0.14 0.15 0.16 0.17
Payout ratio 321% 163% 114% 72% 50% 55% 57% 55%
NAV per share (€) 5.42 5.23 5.24 4.58 4.17 4.09 4.05 4.06 4.10 4.22 4.36
TNAV per share (€) 4.23 4.40 3.91 3.55 3.22 3.17 3.30 3.31 3.35 3.46 3.60
46
BBVA SA
Banking
● Price target increased to €5.50: We increase our price target from €4.70 to
€5.60 to reflect EPS upgrades and a reduced capital shortfall. Assuming no
capital shortfall, we arrive at a fair value of €5.80 per share.
Y/E 31/12, EUR m 2015 2016 2017E 2018E 2019E
EPS 0.39 0.50 0.41 0.67 0.62
EPS (adj.) 0.39 0.50 0.41 0.67 0.62
BVPS 7.43 7.21 7.10 7.42 7.77
TBVPS 5.81 5.72 5.79 6.11 6.46
DPS 0.37 0.37 0.22 0.27 0.27
No. of Shares (m) 6,276 6,449 6,617 6,668 6,668
P/E (adj.) 18.5x 14.4x 17.5x 10.6x 11.6x
P/TBV 1.23x 1.25x 1.23x 1.17x 1.11x
RoE 5.0% 6.8% 5.7% 9.3% 8.1%
RoTE 6.3% 8.6% 7.1% 11.3% 9.8%
Dividend Yield 5.2% 5.2% 3.1% 3.8% 3.7%
Payout Ratio 95% 74% 54% 40% 43%
Source: Company data, Berenberg
47
BBVA SA
Banking
SELL
Investment thesis
● BBVA’s strategy relies on size and growth. These are central to its
22 January 2018 Reuters BBVA.MC
corporate planning and come at the expense of rising costs and
Bloomberg BBVA SM risk. As demand remains weak, and interest rates stay lower for
Current price Price target longer, the strategy is likely to continue to disappoint.
Market cap (EUR m) 47,676 ● BBVA is over-reliant on leverage; it is 45x levered on our preferred
EUR 7.40 EUR 5.50 measure. This inhibits capital return and risks shareholder dilution.
19/01/2018 Madrid Close EV (EUR m) -
26,749,06 ● We remain bearish about the macro risks in Spain given high levels
Trading volume of private sector debt and the need for deleveraging. Interest rates
0
Free float 100.0% at the zero bound and deflation pressures will add to revenue
pressures and sustain loan losses at higher levels for longer.
Non-institutional shareholders Share performance
● Benefits from the digital strategy are likely to accrue to customers
None above 3%. High 52 weeks EUR 7.93 via lower pricing. Unrealistic revenue expectations may lead BBVA
Low 52 weeks EUR 5.97 to overinvest, limiting scope for capital return.
Business description Performance relative to ● Our price target is based on a P/TNAV derived from our 2019 RoTE
BBVA is a retail-focused bank with a wide SXXP SX7P and a CAPM-derived cost of equity.
geographic spread of operations including 1mth -0.8% -2.8%
Spain, Mexico, South America and the US. 3mth -0.1% -2.7%
BBVA also has investments in Turkey and
China. 12mth 10.3% 9.4%
0.6 7.5
2014
0.5 2015
2016 7.0
0.4 2017
2018
0.3 6.5
Apr-13
Sep-13
Mar-16
Aug-16
Jan-12
Jun-12
Nov-12
Feb-14
Jul-14
Dec-14
May-15
Oct-15
Jan-17
Jun-17
Nov-17
Apr-13
Sep-13
Mar-16
Aug-16
Jan-12
Jun-12
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Jul-14
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May-15
Oct-15
Jan-17
Jun-17
Nov-17
Mar-16
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Jan-12
Jun-12
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Jul-14
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Feb-14
Jul-14
Dec-14
May-15
Oct-15
Jan-17
Jun-17
Nov-17
Jan-17
Jun-17
Nov-17
Apr-13
Nov-12
0.35 60%
0.30 50%
0.25 40%
0.20 30%
Aug-16
Aug-16
Jul-14
Dec-14
May-15
Jul-14
Dec-14
May-15
Jan-17
Jun-17
Jan-17
Jun-17
Apr-13
Sep-13
Mar-16
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Nov-12
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Nov-17
49
6.0
8.0
20
22
21
17
6.5
7.5
8.5
15
7.0
16
18
19
420
440
340
360
380
400
460
480
Jan-13 Jan-13 Jan-13
May-13 May-13 May-13
Sep-13 Sep-13 Sep-13
Banking
2017
2015
2018
2019
2016
2017
May-14 May-14
2015
2018
2019
2016
May-14
Sep-14 Sep-14 Sep-14
2017
2015
2018
2019
2016
Jan-18 Jan-18 Jan-18
27
24
25
22
23
26
28
29
30
-5%
0%
5%
10%
25%
15%
20%
4.0%
4.2%
5.0%
3.8%
4.4%
4.6%
4.8%
2017
2015
2018
2019
2016
f) Total income (€bn)
2017
2015
2018
2019
2016
May-14 May-14 May-14
2018
2019
2016
50
BBVA SA
Banking
Figure 50: …but this has been offset by lower costs and lower impairments
BBVA – RoE drivers by fiscal year, consensus estimates
a) Total costs (€bn) b) Cost / income
14.0 2015 54%
2015
2016 53% 2016
13.5 2017 2017
2018 52% 2018
13.0 2019 2019
51%
12.5 50%
49%
12.0
48%
11.5
47%
11.0 46%
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
May-13
Sep-13
May-16
Sep-16
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
May-17
Sep-17
Jan-17
May-17
Sep-17
Jan-13
Jan-16
Jan-18
c) PPOP (€bn) d) Loan loss charge (€bn)
16 2015 5.2 2015
2016
2016 5.0
15 2017
2017 2018
2018 4.8 2019
14 2019
4.6
13
4.4
12
4.2
11 4.0
10 3.8
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
May-17
Sep-17
Jan-17
May-17
Sep-17
Jan-16
May-16
Sep-16
Jan-18
Jan-13
May-13
Sep-13
Jan-16
May-16
Sep-16
Jan-18
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-17
Jan-17
May-17
Sep-17
51
Banking
Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General investment
investment-
stment -related
disclosures” and the “Legal disclaimer” at the end of
of this document.
country--specific disclosures, please refer to the respective
For analyst certification and remarks regarding foreign investors and country
paragraph at the end of this document.
Disclosures in respect of Article 20 of Regulation (EU) No. 596/2014 of the European Parliament and of the
Council of 16 April 2014 on market abuse (market abuse regulation – MAR)
Company Disclosures
CaixaBank SA no disclosures
BBVA SA no disclosures
Banco Santander SA no disclosures
HSBC Holdings plc no disclosures
Standard Chartered plc no disclosures
Bankinter SA no disclosures
Bankia SA no disclosures
Banco de Sabadell SA no disclosures
(1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead Manager or Co-
Lead Manager over the previous 12 months of a public offering of this company.
(2) The Bank acts as Designated Sponsor/Market Maker for this company.
(3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company for investment
banking services or received compensation or a promise to pay from this company for investment banking services.
(4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company.
(5) The Bank holds a long position in shares of this company.
(6) The Bank holds a short position in shares of this company.
Date Price target - EUR Rating First dissemination GMT Initiation of coverage
27 June 17 2.30 Sell 2017-06-28 07:08 14 September 15
15 November 17 2.75 Sell 2017-11-15 08:32
Historical price target and rating changes for BBVA SA in the last 12 months
Date Price target - EUR Rating First dissemination GMT Initiation of coverage
08 May 17 4.00 Sell 2017-05-09 07:10 19 March 12
10 November 17 4.70 Sell 2017-11-13 06:30
22 January 18 5.50 Sell -
Historical price target and rating changes for Banco Santander SA in the last 12 months
Date Price target - EUR Rating First dissemination GMT Initiation of coverage
03 February 17 3.00 Sell 2017-02-06 06:58 19 March 12
Historical price target and rating changes for HSBC Holdings plc in the last 12 months
Date Price target - GBp Rating First dissemination GMT Initiation of coverage
03 July 17 600 Hold 2017-07-04 06:56 27 July 11
Historical price target and rating changes for Standard Chartered plc in the last 12 months
Date Price target - GBp Rating First dissemination GMT Initiation of coverage
22 March 17 725 Hold 2017-03-23 07:07 27 July 11
19 September 17 700 Hold 2017-09-20 07:11
Historical price target and rating changes for Bankinter SA in the last 12 months
Date Price target - EUR Rating First dissemination GMT Initiation of coverage
03 February 17 6.70 Hold 2017-02-06 07:01 14 September 15
16 August 17 7.00 Hold 2017-08-17 07:12
52
Banking
Historical price target and rating changes for Bankia SA in the last 12 months
Date Price target - EUR Rating First dissemination GMT Initiation of coverage
27 June 17 2.40 Sell 2017-06-27 18:31 14 September 15
01 August 17 2.70 Sell 2017-08-02 07:04
Historical price target and rating changes for Banco de Sabadell SA in the last 12 months
Date Price target - EUR Rating First dissemination GMT Initiation of coverage
10 November 17 1.10 Sell 2017-11-13 06:32 14 September 15
Click here for a list of all recommendations on any financial instrument or issuer that were disseminated during the preceding 12-
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Berenberg
Berenberg Equity Research ratings distribution and in proportion to investment banking services on a quarterly basis, as
of 1 January
January 2018
General investment-
investment - related disclosures
Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) has made every effort to carefully research all information
contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which
we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the
company which is the subject of this financial analysis.
Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly
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Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The
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Legal disclaimer
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On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or
exercising his/her own judgements.
53
Banking
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Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer
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Analyst
Analyst certification
I, Andrew Lowe, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all
of the subject securities or issuers discussed herein.
In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific
recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction
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Remarks regarding
regardi ng foreign investors
The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions
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United Kingdom
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Third-
Third-party research disclosures
Company Disclosures
CaixaBank SA no disclosures
BBVA SA no disclosures
Banco Santander SA no disclosures
HSBC Holdings plc no disclosures
Standard Chartered plc no disclosures
Bankinter SA no disclosures
Bankia SA no disclosures
Banco de Sabadell SA no disclosures
(1) BCM or its affiliates owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior
month.
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its affiliates. BCM or its affiliates provided the subject company non-investment banking, securities-related services.
(3) BCM or its affiliates received compensation from the subject company during the past 12 months for products or services other
than investment banking services.
(4) During the previous 12 months, BCM or its affiliates has managed or co-managed any public offering for the subject company.
(5) BCM is making a market in the subject securities at the time of the report.
(6) BCM or its affiliates received compensation for investment banking services in the past 12 months, or expects to receive such
compensation in the next 3 months.
54
Banking
(7) There is another potential conflict of interest of the analyst(s), BCM, of which the analyst knows or has reason to know at the
time of publication of this research report.
(8) The research analyst or a member of the research analyst's household serves as an officer, director, or advisory board member
of the subject company
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(10) The research analyst has received compensation from the subject company in the previous 12 months.
* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the
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55
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56