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THIRD QUARTER 2010 BBVA Valuation Metrics 2008 2009 2010E 2011E 2012E Recommendation: SELL PER (adjusted) (x) 5.8 5.9 8.9 8.2 6.3 Fair Value: EUR 8.60 Price/Pre Provis Profit per share (x) 2.7 2.6 2.7 2.8 2.7 P/NAV (adjusted) (x) 1.88 2.14 1.84 1.56 1.29 Share Price: EUR 8.61 RoE (%) (adjusted) 30.7 33.8 22.2 20.7 22.6 Upside / Downside -0.1% RoRWA (%) 1.88 1.90 1.21 1.27 1.59 Implied cost of equity (curve) (%) 18.3 13.2 13.2 14.2 Bloomberg: BBVA Yield (net) (%) 5.8 4.9 1.7 1.8 2.4 Key ratios 2008 2009 2010E 2011E 2012E Core tier 1 ratio 6.0 7.6 7.7 8.6 9.8 Shares In Issue 3,748 Leverage ratio 31.3 35.2 30.2 25.7 21.8 Market Cap 32,270 Cost income ratio 36.8 40.5 39.1 40.2 39.8 Free Float 100% Loan loss charges / loans -0.89 -1.62 -1.72 -1.45 -1.03 RoE (%) (adjusted) 30.7 33.8 22.2 20.7 22.6 NAV 2010E 17,567 RoA (stated) 1.06 1.01 0.68 0.74 0.95 NAV per share 2010 4.7 RoRWA 1.88 1.90 1.21 1.27 1.59 Forthcoming Catalysts P&L Summary 2008 2009 2010E 2011E 2012E Q2 Results 28 July 2010 Net interest income 11,686 13,885 12,973 12,341 12,581 Total non interest income 7,292 6,784 6,798 7,072 7,215 Total gross operating income 18,978 20,670 19,771 19,413 19,797 Costs -6,981 -8,362 -7,725 -7,809 -7,881 Pre Provision Net Operating Income 11,997 12,307 12,046 11,604 11,916 Execution Noble Analysts Loan loss charges -2,940 -5,472 -5,729 -4,824 -3,479 Post provision profit 7,625 6,376 6,117 6,579 8,237 Joseph Dickerson Pre Tax Profit 7,434 6,988 5,414 5,872 7,530 (44) 20 7456 4228 Net profit 5,528 5,459 3,626 3,968 5,156 joseph.dickerson@execution-noble.com EPS adj. 1.49 1.45 0.96 1.06 1.37 Growth rates % 2008 2009 2010E 2011E 2012E Operating income 4 9 -4 -2 2 Pre provision profit 7 3 -2 -4 3 EPS adj. -12 -3 -34 9 30 NAV (adjusted)/share -9 -12 16 18 20 Balance Sheet Summary 2008 2009 2010E 2011E 2012E Total adj assets 538,817 531,194 530,502 532,963 543,449 Goodwill & Intangibles 8,440 14,219 14,436 14,660 14,891 Shareholders' Equity (adjusted) 17,192 15,082 17,567 20,735 24,952 NAV (adjusted)/share 4.6 4.0 4.7 5.5 6.7 NAV per share 6.8 7.8 8.5 9.4 10.6 RWA 283,320 291,026 306,648 319,175 329,167 Tier 1 equity 22,365 27,523 29,150 32,882 37,636 Core tier 1 equity 16,970 22,125 23,752 27,484 32,238 http://www.execution-noble.com Page 30 of 44
THIRD QUARTER 2010 Deutsche Telekom T-Mobile USA remains a drag Deutsche Telekom is our least favourite large cap Telco. T-Mobile USA continues to struggle and we do not believe that the business is out of the woods in Germany, in our view there is a significant risk of a further dividend cut and recent outperformance provides an opportunity to sell the shares. We reiterate our SELL rating on the shares with a recently lowered €7.60 per share fair value. T-Mobile is getting it all wrong in the USA T-Mobile is getting it all wrong in the USA; the business has lost subscribers, suffered a sharp decline in ARPU and seen service revenues decline by around 3% y-o-y over recent quarters. Over the last four quarters its service revenue market share has fallen from 12.7% to 11.9% and its market share of EBITDA and Op FCF has fallen even faster. In the context of a growing market this is an abysmal result for a challenger operator but we see little prospect of the trends improving. Our in depth report “US Mobile Survey: VZW dominates” published on the 2 nd of July highlights T-Mobile’s weak customer perception and that churn is likely to stay at high levels. The lack of a credible data strategy is another key concern and we believe that there is a significant risk that T-Mobile will have to acquire additional spectrum in order to compete for data revenue; this is not yet in our numbers. German mobile is not out of the woods German mobile service revenues returned to growth in the first quarter but we do not believe this will be a permanent feature. The next wave of MTR cuts are likely to be announced in October and given the precedent from recent announcements in UK, Netherlands and Belgium could well be more severe than the cut to €0.05 assumed in our forecasts. The loss of iPhone exclusivity in the fourth quarter of 2010 would remove a key support. Cable operators are rolling out 100Mbps offers Over recent months the German cable operators (Kabel Deutschland and Unitymedia) have started to roll out 100Mbps broadband packages over Docsis 3.0 technology. We believe this will add to the pressure on fixed access line trends even with Deutsche Telekom fighting back with its own triple play offering. The target for 5 million Entertain customers by 2012 is aggressive and could well require further investment in margin. Line loss could also trigger an accelerated FTTH rollout, the costs of which are not in our forecasts. Dividend may face further pressure Given the weak cash cover and negative earnings growth we see significant risk to the medium-term dividend, on our numbers it will fall below €0.70 in 2012. The recent cut to OTE’s dividend will add further pressure but the requirement to fund US Spectrum or FTTH could result in a material cut. Shares have outperformed, opportunity to SELL Deutsche Telekom has outperformed its European peers over recent months, in our view this has not been justified by the financial and operating performance. Our DCF-based fair value of €7.60 is more than 20% below the current share price and we reiterate our SELL recommendation http://www.execution-noble.com SELL 21.7% downside Fair Value €7.60 RIC, Bloomberg Code DTEGn.DE, DTE GY Share Price €9.70 Market Capitalisation €42.3bn Free Float 68.3% EUR bn 2009 2010E 2011E 2012E Net revenue 64.64 61.99 60.04 58.83 EBITDA 20.67 19.70 18.91 18.05 Capex 9.20 9.11 9.03 8.49 FCFE 5.71 3.99 4.51 4.41 Net Debt 40.91 41.90 40.79 39.79 EPS (EUR) 0.78 0.87 0.77 0.67 DPS (EUR) 0.78 0.70 0.70 0.68 All financial estimates are "as reported" DPS includes special dividends 2009 2010E 2011E 2012E EV / Sales 1.4 1.5 1.4 1.5 EV / EBITDA 4.6 4.6 4.7 4.9 P/E 12.5 11.2 12.7 14.8 FCF Yield (%) 9.8% 8.0% 8.5% 8.3% FCFE Yield (%) 13.5% 9.4% 10.6% 10.4% Dividend Yield (%) 8.0% 7.2% 7.2% 7.0% Net Debt / EBITDA 2.0 2.1 2.2 2.2 All multiples based on underlying financials Proportionate adjustments made where appropriate Analysts Andrew Hogley +44 20 7456 1652 andrew.hogley@execution-noble.com Will Draper +44 20 7456 1694 will.draper@execution-noble.com Nick Brown +44 20 7456 1669 nick.brown@execution-noble.com Page 31 of 44
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