Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

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Research Reinvented

Event-Driven

<p>For our next Smartkarma Webinar, we have the pleasure of welcoming back Insight Provider <a href="https://www.smartkarma.com/profiles/jesus-rodriguez-aguilar" target="_blank" data-smartkarma-citation="accounts:5842" rel="noopener">Jesus Rodriguez Aguilar</a> to go over ideas in European Event-Driven. Jesus will examine offers that target FTSE 250 companies (particularly in healthcare and financial services); the real estate sector in Central and Eastern Europe; and special situations in European share classes and holding companies.</p>
<h3>The webinar was hosted on Wednesday, 16 June 2021, 17:00 SGT/HKT.<a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=89974520966" target="_blank" rel="noopener"></a>
</h3>
<p>Watch the session here:</p>
<p><iframe src="https://www.youtube.com/embed/V5Kk8nkuLA8" width="560" height="315" title="YouTube video player" frameborder="0" allow="accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture" allowfullscreen="allowfullscreen"></iframe>Or subscribe to our podcast feed and listen on the go:</p>
<p><iframe src="https://open.spotify.com/embed/episode/34F1xaRo0opzAuBgwai2wy?utm_source=generator" width="100%" height="232" style="border-radius: 12px;" frameborder="0" allowfullscreen="allowfullscreen" allow="autoplay; clipboard-write; encrypted-media; fullscreen; picture-in-picture"></iframe></p>
<p>Jesus Rodriguez Aguilar is an Event-Driven Analyst looking across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations.</p>

For our next Smartkarma Webinar, we have the pleasure of welcoming back Insight Provider Jesus Rodriguez Aguilar to go over ideas in European Event-Driven. Jesus will examine offers that target FTSE 250 companies (particularly in healthcare and financial services); the real estate sector in Central and Eastern Europe; and special situations in European share classes and holding companies.
The webinar was hosted on Wednesday, 16 June 2021, 17:00 SGT/HKT.

Watch the session here:
Or subscribe to our podcast feed and listen on the go:

Jesus Rodriguez Aguilar is an Event-Driven Analyst looking across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations.

Smartkarma Webinar | European Event-Driven: Top Ideas

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 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>  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> have broken off merger discussions</li>
<li>BBVA management can potentially deliver shareholder value through a potential share buyback, but plans o redeploy surplus capital in its core EM markets could increase perceived risk and limit the size of the buyback</li>
<li>Sabadell’s intentions to deliver improved returns, on a stand-alone basis, are, in our view, challenged by its lack of scale, the negative interest rate climate, as well as the TSB drag</li>
<li>Even after today’s sharp fall in the Sabadell share price, we would recommend a short on Sabadell shares – with no M&amp;A premium, Sabadell’s PBV ratio could fall back to close to 0.10x</li>
<li>Risks to our bearish view on Sabadell include finding buyer for TSB in the near term, as well as the potential for another domestic merger with either Liberbank or Unicaja</li>
</ul>



Banco Bilbao Vizcaya Argentari (BBVA SM)  and Banco De Sabadell SA (SAB SM) have broken off merger discussions
BBVA management can potentially deliver shareholder value through a potential share buyback, but plans o redeploy surplus capital in its core EM markets could increase perceived risk and limit the size of the buyback
Sabadell’s intentions to deliver improved returns, on a stand-alone basis, are, in our view, challenged by its lack of scale, the negative interest rate climate, as well as the TSB drag
Even after today’s sharp fall in the Sabadell share price, we would recommend a short on Sabadell shares – with no M&amp;A premium, Sabadell’s PBV ratio could fall back to close to 0.10x
Risks to our bearish view on Sabadell include finding buyer for TSB in the near term, as well as the potential for another domestic merger with either Liberbank or Unicaja


Merger Undone: Tougher Outlook for Sabadell, BBVA Plans Buybacks and EM M&A

European Event-Driven Analyst

Jesus Rodriguez Aguilar

<div>
<p><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.</p>
<p>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.</p>
<p>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.</p>
</div>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>Recommendation is <strong>LONG Sabadell, TP 0.476</strong> (8% spread to closing price on 18 November).</p>
<p>(<em>please read on for deal maths</em>)</p>


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

<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 13<sup>th</sup> 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?

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)

Smartkarma Webinar | European Event-Driven: Top Ideas

On 16 June, 5pm SGT, join us and Jesus Rodriguez Aguilar to go over top ideas in European Event-Driven, including offers that target FTSE 250...

Smartkarma Research

Merger Undone: Tougher Outlook for Sabadell, BBVA Plans Buybacks and EM M&A

Merger breakup equals the end of merger premium for Sabadell shares; despite the share price drop, it is challenged by its lack of scale, the...

Victor Galliano

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

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