European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

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<a href="https://www.smartkarma.com/entities/banco-de-sabadell-sa" target="_blank" data-smartkarma-citation="entities:21295:1" rel="noopener">Banco De Sabadell Sa (SAB SM)</a> 's (Sabadell) share price soared 24.59%  as investors discounted its acquisition by <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> before the announcement, and Tuesday's earnings of the Sabadell share price indicate that the market discounts a 30% premium over Friday's price.
Hours after the deal announcement, BBVA confirmed that it is holding talks with representatives of Sabadell for a potential merger between the two entities, as confirmed to the National Securities Market Commission (CNMV) in a relevant event notice.
Now the situation has changed for BBVA, which is in the drivers seat due to both a recent share price boost (pre-sale to PNC) and the proceeds from the sale to PNC, which increase its capital levels. Therefore BBVA is opportunistically proceeding before a vaccine-based economic recovery and timing both the sale to PNC and a potential acquisition of Sabadell to simultaneously happen.
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The new entity would be the second largest in the Spanish market with assets valued at €596 bn, just behind the new CaixaBank-Bankia, and far ahead of Santander, which would occupy the third position.
An integration with Sabadell would reduce BBVA's exposure to emerging markets, while Sabadell is in a highly vulnerable position (balance sheet and profitability, ROE 1.5%), two good reasons why I believe that this deal will go ahead.
The operation makes sense, especially for BBVA, because Sabadell has lost more than 60% of its market value YTD, while BBVA has fallen by half, at 30%. At the beginning of 2020, BBVA was worth 5x Sabadell whilst now it is 10x Sabadell.
From my calculations, a cash deal should be preferred by BBVA on an EPS basis: 20.4% higher EPS achieved through the integration of Sabadell on 2023, vs. 7.0% in a paper deal.
By acquiring Sabadell at a 40% premium, BBVA would be doing a very good business, especially after selling its bank in the US for 9.7 billion euros and taking over Sabadell for around €2.7 bn. BBVA could even afford paying north of a 50% premium.
Recommendation is LONG Sabadell, TP 0.476 (8% spread to closing price on 18 November).
(please read on for deal maths)


Banco De Sabadell Sa (SAB SM) 's (Sabadell) share price soared 24.59%  as investors discounted its acquisition by Banco Bilbao Vizcaya Argentari (BBVA SM) before the announcement, and Tuesday's earnings of the Sabadell share price indicate that the market discounts a 30% premium over Friday's price.
Hours after the deal announcement, BBVA confirmed that it is holding talks with representatives of Sabadell for a potential merger between the two entities, as confirmed to the National Securities Market Commission (CNMV) in a relevant event notice.
Now the situation has changed for BBVA, which is in the drivers seat due to both a recent share price boost (pre-sale to PNC) and the proceeds from the sale to PNC, which increase its capital levels. Therefore BBVA is opportunistically proceeding before a vaccine-based economic recovery and timing both the sale to PNC and a potential acquisition of Sabadell to simultaneously happen.

The new entity would be the second largest in the Spanish market with assets valued at €596 bn, just behind the new CaixaBank-Bankia, and far ahead of Santander, which would occupy the third position.
An integration with Sabadell would reduce BBVA's exposure to emerging markets, while Sabadell is in a highly vulnerable position (balance sheet and profitability, ROE 1.5%), two good reasons why I believe that this deal will go ahead.
The operation makes sense, especially for BBVA, because Sabadell has lost more than 60% of its market value YTD, while BBVA has fallen by half, at 30%. At the beginning of 2020, BBVA was worth 5x Sabadell whilst now it is 10x Sabadell.
From my calculations, a cash deal should be preferred by BBVA on an EPS basis: 20.4% higher EPS achieved through the integration of Sabadell on 2023, vs. 7.0% in a paper deal.
By acquiring Sabadell at a 40% premium, BBVA would be doing a very good business, especially after selling its bank in the US for 9.7 billion euros and taking over Sabadell for around €2.7 bn. BBVA could even afford paying north of a 50% premium.
Recommendation is LONG Sabadell, TP 0.476 (8% spread to closing price on 18 November).
(please read on for deal maths)

BBVA-Sabadell "Merger" Conversations, Deal Numbers

Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

<ul>
<li>A merged BBVA-Sabadell would be the second largest Spanish bank by domestic assets, and one with substantial potential for branch network streamlining and cost savings supported by BBVA’s digital expertise</li>
<li>The big challenge in this process is TSB, <a href="https://www.smartkarma.com/entities/banco-de-sabadell-sa" target="_blank" data-smartkarma-citation="entities:21295:1" rel="noopener">Banco De Sabadell Sa (SAB SM)</a>’s loss-making UK subsidiary, which is, ideally, a disposal candidate</li>
<li>Sabadell’s low PBV ratio reflects, in part, Sabadell’s relatively low Spanish NPL coverage and, more importantly, the TSB “drag”</li>
<li>There is some activity in the M&amp;A market for small UK banks, as we will focus on in this report, but pricing is likely to be depressed</li>
<li>In the event of a successful TSB disposal, and given the <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a>  merger talks, we believe that Sabadell would justify a further 20-25% premium to its current market value</li>
<li>An alternative, and sub-optimal, path would be to retain TSB post-restructuring (2022-23), and extract better value from the sale, but this would be a management distraction from the prospective Sabadell-BBVA merger of the Spanish operations</li>
<li>Risks to our positive view on Sabadell include the failure to agree on merger terms between the two parties, resulting in a termination of discussions; also poorer than expected performance from TSB’s restructuring programme and continued headwinds on credit quality</li>
</ul>


A merged BBVA-Sabadell would be the second largest Spanish bank by domestic assets, and one with substantial potential for branch network streamlining and cost savings supported by BBVA’s digital expertise
The big challenge in this process is TSB, Banco De Sabadell Sa (SAB SM)’s loss-making UK subsidiary, which is, ideally, a disposal candidate
Sabadell’s low PBV ratio reflects, in part, Sabadell’s relatively low Spanish NPL coverage and, more importantly, the TSB “drag”
There is some activity in the M&amp;A market for small UK banks, as we will focus on in this report, but pricing is likely to be depressed
In the event of a successful TSB disposal, and given the Banco Bilbao Vizcaya Argentari (BBVA SM)  merger talks, we believe that Sabadell would justify a further 20-25% premium to its current market value
An alternative, and sub-optimal, path would be to retain TSB post-restructuring (2022-23), and extract better value from the sale, but this would be a management distraction from the prospective Sabadell-BBVA merger of the Spanish operations
Risks to our positive view on Sabadell include the failure to agree on merger terms between the two parties, resulting in a termination of discussions; also poorer than expected performance from TSB’s restructuring programme and continued headwinds on credit quality


Banco De Sabadell (SAB SM): TSB, Fly in the Merger Ointment

Banco Bilbao Vizcaya Argentari / Event-Driven

<ul>
<li>In our view, the PNC-BBVA USA Bancshares deal reflects the trend towards “in country” domestic bank consolidation in developed markets, given very low interest rates, the pressure on fees and the need to focus on opex reduction</li>
<li>The attractive price tag of USD11.6bn (€9.7bn) provides <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> with a big capital uplift at a limited cost to earnings; it reflects a historic (2019A) PE multiple of 19.7x and PTBV ratio of 1.34x, equivalent to 45% of market cap on at the close of 13th November</li>
<li>The US commercial bank disposal also gives BBVA a 294bps boost to its core capital ratio, which stood at 11.52% at 3Q20 end, and post deal would result in CET1 ratio of c 14.5%</li>
<li>Even though BBVA’s disposal will be EPS dilutive post-deal, the cost of foregone earnings is relatively low, given the sale price; USA Bancshares accounted for less than 10% of groups earnings in 2019 and 13% of the group’s gross income in the first nine months of 2020</li>
<li>BBVA management intends to redeploy capital in its core markets, and also has the option to do a large share buy-back at current share prices, ECB permitting</li>
<li>The big question is how management will focus on excess capital redeployment through potential M&amp;A going forward, and will look to redress the earnings split between its core emerging (c 70%) and developed markets (c 30%), post this disposal; we put forward our views on M&amp;A options in this report</li>
<li>Risks to our positive view on BBVA include the ECB maintaining strict regulatory constraints on a share buyback; also that BBVA is selling its USA franchise at a relatively low point in the macro-economic cycle</li>
</ul>


In our view, the PNC-BBVA USA Bancshares deal reflects the trend towards “in country” domestic bank consolidation in developed markets, given very low interest rates, the pressure on fees and the need to focus on opex reduction
The attractive price tag of USD11.6bn (€9.7bn) provides Banco Bilbao Vizcaya Argentari (BBVA SM) with a big capital uplift at a limited cost to earnings; it reflects a historic (2019A) PE multiple of 19.7x and PTBV ratio of 1.34x, equivalent to 45% of market cap on at the close of 13th November
The US commercial bank disposal also gives BBVA a 294bps boost to its core capital ratio, which stood at 11.52% at 3Q20 end, and post deal would result in CET1 ratio of c 14.5%
Even though BBVA’s disposal will be EPS dilutive post-deal, the cost of foregone earnings is relatively low, given the sale price; USA Bancshares accounted for less than 10% of groups earnings in 2019 and 13% of the group’s gross income in the first nine months of 2020
BBVA management intends to redeploy capital in its core markets, and also has the option to do a large share buy-back at current share prices, ECB permitting
The big question is how management will focus on excess capital redeployment through potential M&amp;A going forward, and will look to redress the earnings split between its core emerging (c 70%) and developed markets (c 30%), post this disposal; we put forward our views on M&amp;A options in this report
Risks to our positive view on BBVA include the ECB maintaining strict regulatory constraints on a share buyback; also that BBVA is selling its USA franchise at a relatively low point in the macro-economic cycle


BBVA: So Long, Sun-Belt – What Next; Buybacks and Potentially M&A?

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Risk markets rallied on expectations that a meaningful economic restart will be brought forward following news of <a href="https://www.smartkarma.com/entities/pfizer-inc" target="_blank" data-smartkarma-citation="entities:1131:1" rel="noopener">Pfizer's (PFE US)</a> preliminary success rate of 90% in its Coronavirus vaccine trials. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, Caa rated corporates continued to tighten by more than the Asia High Yield (HY) index and other components of the US HY complex.Following two days of initial euphoria, markets consolidated on news of increased Coronavirus contagion. The growing footprint of Coronavirus related, pre-Christmas, restrictions across Europe and the US may be a headwind for economic growth over the near term.In the rate markets, a sharp jump in US yields early in the week retraced as the week progressed and attracted end-user buying, particularly in Asia. Japanese investors were reported to have been strong buyers of 7- to 10-year Treasuries. One of the developing risks at this point is that the reflation trade does not resurface while federal stimulus is constrained, and near-term economic prospects reduce. A tepid increase in yields could limit the effectiveness of any fresh Fed action. Against this background, almost all Asia-headquartered bonds tightened relative to their benchmark spreads as vaccine progress and US Treasury curve steepening increased prospects for higher net interest margins. Amongst Additional Tier 1 bonds, Thai-headquartered banks led advances as the Bank of Thailand lifted a dividend ban and stated that the financial institutions have sufficient capital and loan-loss provisions to withstand the impact of COVID-19. This sounds like cheer-leading and we are tempted to fade this rally. Concurrently, Turkish HY Senior Unsecured bank bonds materially outperformed their global peers in anticipation of more orthodox monetary and economic policies. Given the starting point for a potential Turkish bank bond rally, we may see higher returns from Turkish- as opposed to Thai-bank bonds.In the debt capital markets, over US$30 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. When we noted last week that issuers were likely to bring 2021 issuance needs forward, we did not anticipate a flood like this. In what may have been the busiest bank bond issuance week of the year, the amount issued was almost one-half the amount brought in the prior eight weeks.Market Outlook: Over the near term, positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets. Over the medium term, a less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including EM fixed income securities over time.

Risk markets rallied on expectations that a meaningful economic restart will be brought forward following news of Pfizer's (PFE US) preliminary success rate of 90% in its Coronavirus vaccine trials. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, Caa rated corporates continued to tighten by more than the Asia High Yield (HY) index and other components of the US HY complex.Following two days of initial euphoria, markets consolidated on news of increased Coronavirus contagion. The growing footprint of Coronavirus related, pre-Christmas, restrictions across Europe and the US may be a headwind for economic growth over the near term.In the rate markets, a sharp jump in US yields early in the week retraced as the week progressed and attracted end-user buying, particularly in Asia. Japanese investors were reported to have been strong buyers of 7- to 10-year Treasuries. One of the developing risks at this point is that the reflation trade does not resurface while federal stimulus is constrained, and near-term economic prospects reduce. A tepid increase in yields could limit the effectiveness of any fresh Fed action. Against this background, almost all Asia-headquartered bonds tightened relative to their benchmark spreads as vaccine progress and US Treasury curve steepening increased prospects for higher net interest margins. Amongst Additional Tier 1 bonds, Thai-headquartered banks led advances as the Bank of Thailand lifted a dividend ban and stated that the financial institutions have sufficient capital and loan-loss provisions to withstand the impact of COVID-19. This sounds like cheer-leading and we are tempted to fade this rally. Concurrently, Turkish HY Senior Unsecured bank bonds materially outperformed their global peers in anticipation of more orthodox monetary and economic policies. Given the starting point for a potential Turkish bank bond rally, we may see higher returns from Turkish- as opposed to Thai-bank bonds.In the debt capital markets, over US$30 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. When we noted last week that issuers were likely to bring 2021 issuance needs forward, we did not anticipate a flood like this. In what may have been the busiest bank bond issuance week of the year, the amount issued was almost one-half the amount brought in the prior eight weeks.Market Outlook: Over the near term, positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets. Over the medium term, a less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including EM fixed income securities over time.

Bank Credit Weekly: Vaccine Rally, Then Consolidation, Drives Outperformance & Turkey Vs Thai Banks

Equity Bottom-Up

Grupo Financiero Banorte SAB d / Equity Bottom-Up

Grupo Financiero Banorte SAB d (GFNORTEO MF)

<ul>
<li>
<a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a>’s 3Q 2020 results underscore the improvement in Mexican credit quality</li>
<li>
<a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a>’s recently announced better 2020 guidance is driven by management’s improved Mexico outlook</li>
<li>
<a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a>  reports results on 30th October, and we expect to see better credit volumes, as well as a lower QoQ cost of risk to drive its returns recovery</li>
<li>We believe that Mexican equity valuations generally are very attractive, and within LatAm financials Banorte’s valuations to prospective returns stand out</li>
<li>Risks to our view include worse than expected credit quality in consumer and SME credit, as well as softer credit spreads and loan volumes at Banorte</li>
</ul>



Citigroup Inc (C US)’s 3Q 2020 results underscore the improvement in Mexican credit quality

Banco Bilbao Vizcaya Argentari (BBVA SM)’s recently announced better 2020 guidance is driven by management’s improved Mexico outlook

Grupo Financiero Banorte-O (GFNORTEO MF)  reports results on 30th October, and we expect to see better credit volumes, as well as a lower QoQ cost of risk to drive its returns recovery
We believe that Mexican equity valuations generally are very attractive, and within LatAm financials Banorte’s valuations to prospective returns stand out
Risks to our view include worse than expected credit quality in consumer and SME credit, as well as softer credit spreads and loan volumes at Banorte


Banorte (GFNORTEO MM): Constructive Citi and BBVA Read-Across for 3Q 2020

Spain

Banco Bilbao Vizcaya Argentaria, S.A. attracts deposits and offers retail, wholesale, and investment banking services.  The Bank offers consumer and mortgage loans, private banking, asset management, insurance, mutual funds, and securities brokerage services.  It operates in Europe, Latin America, United States, China and Turkey.

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Banco Bilbao Vizcaya Argentari (BBVA SM)

BBVA-Sabadell "Merger" Conversations, Deal Numbers

By acquiring Sabadell at a 40% premium, BBVA would be doing a very good business, especially after selling its bank in the US for 9.7 billion euros...

Jesus Rodriguez Aguilar

Banco De Sabadell (SAB SM): TSB, Fly in the Merger Ointment

We see re-rating potential at Sabadell, with the key catalyst as the TSB disposal, which would, in our view, improve investor sentiment and...

Victor Galliano

BBVA: So Long, Sun-Belt – What Next; Buybacks and Potentially M&A?

BBVA's sale of its US bank will give it excess capital to redeploy, in both share buybacks and potentially M&A too; we explore some potential M&A...

Victor Galliano

Bank Credit Weekly: Vaccine Rally, Then Consolidation, Drives Outperformance & Turkey Vs Thai Banks

Positive vaccine news and the US election result lowers the likelihood of excessive US stimulus. This should cap pressure on Treasury yields and...

Hank Calenti, CFA

Banorte (GFNORTEO MM): Constructive Citi and BBVA Read-Across for 3Q 2020

Positive recent read-across trends from both Citi's and BBVA's Mexican operations indicate an improving fundamental outlook for Banorte; combine...

Victor Galliano

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