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.

Event-Driven

<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?

European Event-Driven Analyst

Jesus Rodriguez Aguilar

<ul class="">
<li>The new CaixaBank has established the composition of its Board of directors, which will be the largest domestic bank in Spain.</li>
<li> The independent expert (BDO) has endorsed the exchange ratio,
<ul>
<li>
0.6845 new CaixaBank shares for each Bankia share.</li>
</ul>
</li>
<li>The FROB believes that the operation will have a positive effect on the recovery of the aid.</li>
</ul>
I recommend keeping an eye on the spread.
<ul>
<li>It closed on 27 October at 1.66% (gross), not far from the maximum reached on 20 October of 1.73%, and in any case an interesting level for a deal that will certainly close (est. March 2021).
</li>
</ul>
Further catalysts post-merger are (increased) dividend payouts and the exit in the short to medium term of the Kingdom of Spain from the capital of the merged entity.
M&amp;A consolidation seems as a reasonable way to reduce costs and protect profits. These can be among domestic banks or, much to the liking of the ECB, between banks domiciled in different EU countries that share common markets, and would create European champions (see list of banks that appear in many rumours at the end of the note).


The new CaixaBank has established the composition of its Board of directors, which will be the largest domestic bank in Spain.
 The independent expert (BDO) has endorsed the exchange ratio,


0.6845 new CaixaBank shares for each Bankia share.


The FROB believes that the operation will have a positive effect on the recovery of the aid.

I recommend keeping an eye on the spread.

It closed on 27 October at 1.66% (gross), not far from the maximum reached on 20 October of 1.73%, and in any case an interesting level for a deal that will certainly close (est. March 2021).


Further catalysts post-merger are (increased) dividend payouts and the exit in the short to medium term of the Kingdom of Spain from the capital of the merged entity.
M&amp;A consolidation seems as a reasonable way to reduce costs and protect profits. These can be among domestic banks or, much to the liking of the ECB, between banks domiciled in different EU countries that share common markets, and would create European champions (see list of banks that appear in many rumours at the end of the note).

Bankia - CaixaBank: Merger in Progress, Spread Attractive

Media (Bolsamanía, Bloomberg) reported during the weekend that "Spain’s Unicaja is Said to Move Closer to Liberbank Takeover".As a result:
<ul>
<li>
<a href="https://www.smartkarma.com/entities/unicaja-banco-sa" target="_blank" data-smartkarma-citation="entities:28379:1" rel="noopener">Unicaja Banco SA (UNI SM)</a> has confirmed to the National Securities Market Commission (CNMV, the Spanish market watchdog) "preliminary contacts with Liberbank, with the knowledge of the Board of Directors without, for the moment, the participation of external advisers and without having made a decision in this regard."</li>
<li>
<a href="https://www.smartkarma.com/entities/liberbank-sa" target="_blank" data-smartkarma-citation="entities:21279:1" rel="noopener">Liberbank SA (LBK SM)</a> has confirmed "preliminary contacts with Unicaja Banco, without, so far, having adopted any decision in this regard."</li>
</ul>
During Monday's trading session, Unicaja's shares gained 10% whilst Liberbank's gained 16%. Over the last two sessions, investors have booked some profits and the shares of Unicaja have dropped by 8% and those of Liberbank by 4%.
Last year, both banks held conversations regarding a merger, but the conversations stopped mainly about discrepancies on the exchange ratio and the top management positions.
Both banks are well capitalised, but their P/BV is around 0.3x. The merger of both entities would have proforma assets of EUR 108.8 bn, potentially the fifth largest group in Spain, which would allow it to try to acquire Ibercaja Banco (unlisted).
<div>
Recommendation is long Liberbank / short Unicaja, using a 40.4% / 59.6% exchange ratio.
<div>
Risks: the float in Unicaja is currently 28.3%, so there is a short squeeze risk in a position to capture the spread, especially if Abanca enters the fray.
</div>
</div>
Read across: <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> seems to be now the Spanish bank with the lowest ROE (even negative), and rumors are that it is being shopped around. A potential operation could be a combination <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> - Sabadell.

Media (Bolsamanía, Bloomberg) reported during the weekend that "Spain’s Unicaja is Said to Move Closer to Liberbank Takeover".As a result:


Unicaja Banco SA (UNI SM) has confirmed to the National Securities Market Commission (CNMV, the Spanish market watchdog) "preliminary contacts with Liberbank, with the knowledge of the Board of Directors without, for the moment, the participation of external advisers and without having made a decision in this regard."

Liberbank SA (LBK SM) has confirmed "preliminary contacts with Unicaja Banco, without, so far, having adopted any decision in this regard."

During Monday's trading session, Unicaja's shares gained 10% whilst Liberbank's gained 16%. Over the last two sessions, investors have booked some profits and the shares of Unicaja have dropped by 8% and those of Liberbank by 4%.
Last year, both banks held conversations regarding a merger, but the conversations stopped mainly about discrepancies on the exchange ratio and the top management positions.
Both banks are well capitalised, but their P/BV is around 0.3x. The merger of both entities would have proforma assets of EUR 108.8 bn, potentially the fifth largest group in Spain, which would allow it to try to acquire Ibercaja Banco (unlisted).

Recommendation is long Liberbank / short Unicaja, using a 40.4% / 59.6% exchange ratio.

Risks: the float in Unicaja is currently 28.3%, so there is a short squeeze risk in a position to capture the spread, especially if Abanca enters the fray.


Read across: Banco De Sabadell Sa (SAB SM) seems to be now the Spanish bank with the lowest ROE (even negative), and rumors are that it is being shopped around. A potential operation could be a combination Banco Bilbao Vizcaya Argentari (BBVA SM) - Sabadell.

Liberbank - Unicaja: Merger Conversations, Exchange Ratio

The Boards of both <a href="https://www.smartkarma.com/entities/bankia-sa" target="_blank" data-smartkarma-citation="entities:21252:1" rel="noopener">Bankia SA (BKIA SM)</a> and <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a> have approved the merger (in fact, the takeover of Bankia by CaixaBank) of both entities to create the biggest domestic bank in Spain.
<ul>
<li>target synergies of EUR 770 mn per year, and EUR 290 mn in extra turnover over the next five years (above my conservative scenario), target RoTE of 8% and efficiency ratio of 47.9%.</li>
</ul>
The exchange ratio has been bang-on the one mentioned in previous insights:
<ul>
<li>Actual 0.6845 shares of Caixabank per Bankia share (vs. the 0.68 mentioned using the implied exchange rates by 9) September).</li>
<li>No rights issue.</li>
</ul>
Recommendation: this merger will close and I recommend setting up the spread long 1 share of Bankia / shorting 0.6845 shares of CaixaBank (the gross spread is 1.6% as I write).
Considering the likely synergies could mean up to nearly 20% in the case of CaixaBank and c. 15% in the case of Bankia. On these grounds, both could be "long only" investment recommendations.
Read across: this merger will put pressure in smaller Spanish lenders, such as <a href="https://www.smartkarma.com/entities/liberbank-sa" target="_blank" data-smartkarma-citation="entities:21279:1" rel="noopener">Liberbank SA (LBK SM)</a> , <a href="https://www.smartkarma.com/entities/unicaja-banco-sa" target="_blank" data-smartkarma-citation="entities:28379:1" rel="noopener">Unicaja Banco SA (UNI SM)</a> , both currently solidly capitalised but barely profitable, and <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> with its coveted position in Spanish SMEs. All three are the main candidates in any forthcoming corporate activity, with Liberbank as the main takeover target.

The Boards of both Bankia SA (BKIA SM) and CaixaBank SA (CABK SM) have approved the merger (in fact, the takeover of Bankia by CaixaBank) of both entities to create the biggest domestic bank in Spain.

target synergies of EUR 770 mn per year, and EUR 290 mn in extra turnover over the next five years (above my conservative scenario), target RoTE of 8% and efficiency ratio of 47.9%.

The exchange ratio has been bang-on the one mentioned in previous insights:

Actual 0.6845 shares of Caixabank per Bankia share (vs. the 0.68 mentioned using the implied exchange rates by 9) September).
No rights issue.

Recommendation: this merger will close and I recommend setting up the spread long 1 share of Bankia / shorting 0.6845 shares of CaixaBank (the gross spread is 1.6% as I write).
Considering the likely synergies could mean up to nearly 20% in the case of CaixaBank and c. 15% in the case of Bankia. On these grounds, both could be "long only" investment recommendations.
Read across: this merger will put pressure in smaller Spanish lenders, such as Liberbank SA (LBK SM) , Unicaja Banco SA (UNI SM) , both currently solidly capitalised but barely profitable, and Banco De Sabadell Sa (SAB SM) with its coveted position in Spanish SMEs. All three are the main candidates in any forthcoming corporate activity, with Liberbank as the main takeover target.

CaixaBank - Bankia: Definitive Agreement and Exchange Ratio

Spain

Banco de Sabadell SA attracts deposits and offers commercial banking services. The Bank offers mortgage, consumer, student, and building improvement loans, private banking services, and insurance, and sponsors Visa credit cards.  The Bank operates branches throughout Spain, elsewhere in Europe, the Caribbean, the Americas, and Asia.

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Banco De Sabadell SA (SAB SM)

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

Bankia - CaixaBank: Merger in Progress, Spread Attractive

I recommend keeping an eye on the spread. It closed today (27 October) at a gross 1.66%, an interesting level for a deal that will certainly close...

Jesus Rodriguez Aguilar

Liberbank - Unicaja: Merger Conversations, Exchange Ratio

Following Bloomberg/media reports Unicaja has confirmed to the National Securities Market Commission (CNMV) "preliminary contacts with Liberbank,...

Jesus Rodriguez Aguilar

CaixaBank - Bankia: Definitive Agreement and Exchange Ratio

The Boards of both Bankia and CAixaBank have approved the merger of both entities to create the biggest domestic bank in Spain.

Jesus Rodriguez Aguilar

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