SILVER BULLETS - Espirito Santo Investment Bank incorporating ...

THIRD QUARTER 2010
BBVA
Uncompelling risk/reward
We include BBVA in this quarter's Silver Bullets as a SELL, paired
with a long recommendation in LLOY. The pair is selected based on
the view that BBVA is over-valued (1.8x P/TNAV 2010) and faces
deteriorating fundamentals in its domestic market (which accounts
for >45pct of net earnings). Further the bank's balance sheet has not
undergone such a purposefully draconian stress test as the UK's FSA
conducted on LLOY last year (and which resulted in a £13.5bn rights
issue and £9.0bn debt exchange for that bank). Catalysts for the
SELL on BBVA will be the likely publication of Europe-wide stress
tests this summer, as well as Q2 results on 4th August.
Stress test to reveal balance sheet weakness
We have stress tested BBVA's balance sheet using moderately severe cumulative
loss assumptions across the group's domestic book and also a 10% haircut on
Spanish sovereign bonds. Our stress test reveals that BBVA would need EUR11bn
in order to maintain an 8% core T1 ratio following the burndown analysis.
The Spanish stress tests will need to be sufficiently conservative to draw a line
under market concerns that the capital position is not strong enough to withstand
the macro pressures in Spain and dislocation in the international wholesale funding
markets. In addition publishing assumed haircuts on sovereign bonds may be self
fulfilling and be negative for the cost of equity.
Loss absorbing capacity at risk
Historically the attraction of the Spanish banks was high pre provision earnings so
that their loss absorbing capacity was not in question. Now net interest income is
under pressure from the lagged impact of EURIBOR. At the same time wholesale
funding costs are elevated (as a proxy, BBVA's CDS has increased 170bp in the last
three months) and likely to further pressure pre-provision profitability. BBVA has a
significant reliance on wholesale funding in Europe with a 217% loan/deposit ratio
(group is 127%). This is not reflected in consensus (downgrades of 4% ytd) and we
are more than 20% below consensus in 2010-2011.
No escape from Spanish macro
Iberia is >45% of group earnings and the macro outlook for this market is
fundamentally deteriorating. We expect negative credit growth of 5% per annum
over 2010-2012, and NPLs are expected to peak in 2011.
Valuations
We value BBVA at EUR 8.6, or a multiple of 1.3x our 2012 book value however such
a multiple may indeed be hard to fetch in the context of a prospective capital raise
and ongoing uncertainty in the wholesale funding system.
http://www.execution-noble.com
SELL
0% upside
Fair Value €8.60
RIC, Bloomberg Code BBVA.MC, BBVA SM
Share Price €8.6
Market Capitalisation €32,270
Free Float 100%
€m (unless stated) 2009 2010E 2011E 2012E
Pre-provision profit 12,307 12,046 11,604 11,916
Pre-tax profit 6,988 5,414 5,872 7,530
Adjusted net profit 5,459 3,626 3,968 5,156
EPS adj 1.45 0.96 1.06 1.37
DPS 0.42 0.15 0.16 0.21
BV (adj) ps 4.02 4.69 5.53 6.66
ROE (adj) (%) 34% 22% 21% 23%
LLP as % loans -1.62% -1.72% -1.45% -1.03%
Core Tier 1 ratio (%) 7.6% 7.7% 8.6% 9.8%
€ (unless stated) 2009 2010E 2011E 2012E
Adjusted P/E 5.9 8.9 8.2 6.3
Pre-provision multiple 2.6 2.7 2.8 2.7
Price / book 1.1 1.0 0.9 0.8
Price / adj book 2.1 1.8 1.6 1.3
Yield (%) 4.9% 1.7% 1.8% 2.4%
ROE (%) 20% 12% 12% 14%
Cost income ratio (%) 40% 39% 40% 40%
BVps 7.82 8.54 9.44 10.63
Analysts
Joseph Dickerson
+44 20 7426 4228
joseph.dickerson@execution-noble.com
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