The bank has managed to keep the fire since the European Central Bank zeroed interest rates back in 2015. It has not been easy. The Covid was a real gale that threatened to extinguish the flame before even the final recovery could ignite, but it did not succeed. Today the large Spanish bank is in a position to affirm that it has returned to be profitable, despite the ECB and not thanks to it. Now it only remains for Christine Lagarde to light the fuse that will lead to the explosion of the sector, although this will have to wait, foreseeably, until the year 2023.
In the meantime, which is a lot, financial institutions, through crisis, have shown that they are capable of surviving a period of drought that has lasted for more than six years. With the data in hand for the month of June, the large national bank – namely Santander, BBVA and CaixaBank – achieved an average ROE (return on capital, for its acronym in English) of 9.8%, practically 10% which traditionally calculates the market which is the cost of capital. There are those who think within the same sector, on the other hand, that it is an outdated data and very far from the real cost at which the banks are financing.
The latest issuance of Banco Santander perpetual debt this year -the first in May and the last on September 21 for a total of 2,000 million euros- were made at an average coupon of 4.187%, including a historical record among the Southern European entities that equaled CaixaBank, which also issued last month at 3.65%. Sabadell, who has – due to its risk profile – the highest cost of financing in the sector issued 500 million in CoCos in March at 5.75%.
Be that as it may, the bank has done its homework to ensure that its results regain lost ground once the ECB raises rates. In addition to being profitable by themselves -without the help of the price of money, which is the main factor that increases the interest margin-, closed 2020 with provisions amounting to 8,350 million euros among the six listed entities to alleviate possible Covid defaults. If they are not necessary (taking into account that the vast majority of the moratoriums have already expired) they could become an extraordinary result as of next year – never this one – if delinquencies continue to be controlled, against all odds.
With the latest available data for the month of July published by the Bank of Spain (BdE), the average NPL ratio of the national financial sector fell to 4.39%. Among the listed companies, and in this order, far from skyrocketing, at the end of June the default was 4.2% at BBVA, 3.7% Unicaja, 3.6% CaixaBanl, 3.58% Sabadell, 3.22% Santander and 2.34% Bankinter.
Upward potential
For several years, the main fund managers chose to stay out of the bank, given the lack of visibility that affected the sector, despite the fact that they were trading at knockdown prices. Today the movie is another. Three entities, Unicaja, Santander and CaixaBank achieve a purchase council; BBVA is a hold and Bankinter and Sabadell a sale, something classic now, taking into account that the orange entity is the only one that trades with a premium (low) over the value of its own funds and that the shares of the Catalan entity have doubled their value since January, leaving you without potential. “The momemtum de Sabadell continues to improve. The entity expects an increase in the net interest margin over 5% from 2020 to 2023. The focus continues on cutting expenses, through an efficiency program of 100 million euros by 2022. And although Sabadell’s management continues to deny the possible sale of TSB, we believe that there is a willingness to do so “, they assure from Bloomberg Intelligence that describe a very clear photo of the moment of the entity. Financial sources maintain that that sale of TSB will come once the British subsidiary has been made profitable and optimize to the maximum the disbursement of 2,300 million that it made in 2015.
Deutsche Bank expects a cet1 capital ratio of 13% for the new Unicaja after the merger with Liberbank
Large Spanish banks have an upward potential of close to 15%, which is the average of 8% for BBVA – the highest since 2018 and the most bullish entity in the last two years, with a 32% revaluation – and of, over all, 17% of Santander and 19% of CaixaBank.
Unicaja is the entity with the best recommendation – as has been the case for years – and also with the highest potential, of more than 26%. This is because the market continues to demand an unparalleled discount from its peers. Its capitalization represents only 33% of the value of its own funds. It is the second highest discount for Spanish banks, only surpassed by Sabadell, where it is close to 80%. And that the market trusts the future of the new entity after its merger with Liberbank. It will present the first joint results on November 3.
“Unicaja has the largest excess of capital over its capitalization of all Spanish banks [la entidad lo valoró en 1.600 millones en la última presentación de resultados], which increases the potential for remuneration for its shareholders, “they point out from Barclays.”We believe that synergies will be the great driver that improves their results, and that they will contribute 40% of the net result for the year 2023“According to analysts at Deutsche Bank, who estimate the synergies at around 192 million euros in this three-year period. The consensus foresees a profit of 365 million for 2023. They also believe that Unicaja will lead the common capital ratio ( demanded by Frankfurt) after the merger with 13% of fully loaded.
Liquidity
And this is the other great issue that occupies and worries -although not so much- the shareholders of banks, who in Spain are the majority. Why? Industry sources assure that Frankfurt “has already tightened the Spanish entities enough” and that now “it is the turn of the rest of Europe.” Homework seems to be done keeping in mind that, on average, National banks have a liquidity cushion based on the most demanding criterion requested by the ECB, the CET1 fully loaded, 410 basis points. Among the listed entities, BBVA registered the highest ordinary capital ratio in June, 14.2%, 560 points above the 8.6% requested by the body. Unicaja managed to place it at 17.7%, although Liberbank was not included in the equation.
Looking at the end of the financial year, the ECB will once again review the minimum requirements, which range from 7.7% for Bankinter to 8.9% for Santander, since in this case the systemic entity risk is also quantified.
That excess capital could even lead the banks to double the money they allocate to dividends, although it is an unrealistic assumption. On the other hand, analysts do see it as a catalyst for action for two reasons: because there are no doubts about the viability of the sector and because it could have repercussions in a higher return to shareholders once the specter of a possible increase in shareholders fades. delinquencies as a result of the pandemic.
The yield of the dividend of Unicaja, Santander and CaixaBank will exceed levels of 7% in 2023
With the precise aim of controlling the defaults derived from the paralysis and unemployment of the Covid, the ECB took a step forward by prohibiting the remuneration of the bank on the 2020 accounts to avoid unnecessary capital outflows. And this is another catalyst in the sector today.
The average profitability of the planned payments charged to 2021 of the six entities reaches 5.7%, including the already announced buybacks of Santander and BBVA. The consensus does not rule out that Unicaja can follow in its footsteps, although sources from the entity maintain that, if approved, it would not be announced until next year. Two years from now, the profitability of the sector’s payments exceeds in some cases, such as Unicaja, Santander or CaixaBank, 7% at current prices, although logic leads to think that the return of the dividend will soften if the sector manages to return to be traded adjusting its price to its book value. The tailwind that could motivate this scenario would be an ECB rate hike, which is not seen until the 2023 horizon.
“A possible rise in the Euribor and the withdrawal of purchases by central banks are a challenge that will make the funds Next Generation Europeans and the increase in consumer credit are key “for the recovery of the banking system. In the case of CaixaBank, they aspire to loans of 70,000 million euros, the equivalent to its 25% share in loans in Spain.
Santander and BBVA also play in their favor with the rate hike in Brazil – which the consensus sees at 7.5% by the end of 2022 and that of Mexico, which recently increased them to 4.75%.
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