425: BBVA CEO Confident in 22% ROTE, Defends Sabadell Offer

BBVA's CEO outlines a confident outlook for 22% ROTE by 2028, driven by diversified growth and digital advantage, while robustly defending the Sabadell tender offer against board rejections.

Summary

• BBVA targets an average Return on Tangible Equity (ROTE) of 22% over the 2025-2028 strategic plan period.
• The previous 2021-2024 plan successfully delivered 20% ROTE and an 18% compounded annual growth rate in tangible book value per share plus dividends.
• BBVA is recognized as the number one bank in profitability and growth among the 15 largest European banks.
• Confidence in future performance is attributed to a diversified presence in low-leverage countries, strong leading franchises (e.g., Mexico's 27% ROTE vs. industry's 16%), and early, significant investment in digitalization, with two-thirds of new customer acquisitions now digital.
• The company anticipates robust activity growth will absorb customer spread declines from falling interest rates, with activity growth directly boosting profits once rates stabilize.
• BBVA projects generating 49 billion euros in capital over the plan period, comprising 48 billion in core profits (39 billion tangible value creation), 4.5 billion in existing excess capital, and 5 billion from STS securitizations.
• Of the 49 billion euros generated, 13 billion euros will be allocated to growth (new Risk-Weighted Assets) and 36 billion euros for shareholder remuneration.
• Mexico contributes almost 60% of BBVA's profits, with a 27% ROTE, and its economic outlook is positive, showing a 4.1% increase in export volume and a 10% rise in foreign direct investment in the first half of the year; lending growth in Mexico was upgraded to 10%.
• In Spain, BBVA is gaining market share in the companies segment and consumer lending, leveraging technology and digital acquisition, but is not competing aggressively in the mortgage market due to competitor pricing.
• Turkey's economy is normalizing, with inflation decreasing from a peak of 72% to 33% by the end of August; BBVA expects to exit hyperinflationary accounting by 2028 (conservatively, potentially 2027).
• BBVA's tender offer for Sabadell includes a 42% premium on one-month VWAP, which is substantially higher than recent European banking M&A premiums (13-19%).
• The Sabadell acquisition is expected to yield 900 million euros per year in steady-state synergies (pre-tax) from operational consolidation.
• The Spanish government's condition for the Sabadell acquisition requires keeping Sabadell as a separate entity with a separate balance sheet for three years; BBVA expects this merger ban to be lifted by December 2028, with synergies commencing in 2029.

Sentiment

Score: 8

Explanation: The filing presents a very confident and positive outlook for BBVA's organic growth and profitability across its key markets, backed by strong past performance and clear strategic advantages. While the Sabadell acquisition faces regulatory delays, management expresses strong conviction in its long-term value and synergy potential, and the premium offered is substantial. The only minor headwinds are rate sensitivity and mortgage market competition, which are being managed.

Positives

• Targeting an impressive 22% average ROTE for the 2025-2028 strategic plan, building on a strong track record of 20% ROTE delivered in the previous cycle.
• Achieved an 18% compounded annual growth rate in tangible book value per share plus dividends during the 2021-2024 plan, demonstrating consistent value creation.
• Ranked as the number one bank in both profitability and growth among the 15 largest European banks, highlighting superior performance.
• Benefits from strong diversification across low-leverage countries and possesses leading franchises in key markets, such as Mexico with a 27% ROTE compared to the industry's 16%.
• Significant competitive advantage derived from early and substantial investment in digitalization, with two-thirds of new customer acquisitions now originating from digital channels.
• Anticipates robust activity growth in its markets, which is expected to directly translate into profit growth as interest rates stabilize.
• Projects generating 49 billion euros in capital over the plan period, with a substantial 36 billion euros earmarked for shareholder remuneration.
• Mexico's economic outlook is positive, with export volume up 4.1% and foreign direct investment up 10% in the first half of the year, leading to an upgraded lending growth expectation of 10%.
• BBVA Mexico holds dominant market shares, including 44% in payroll services and 39% in the acquiring business, ensuring sustainable profitability.
• Gaining market share in Spain's companies segment and consumer lending, leveraging technological and digital capabilities.
• Turkey's economy is on a path of normalization, with inflation significantly decreasing from 72% to 33% by the end of August, improving the operating environment.
• BBVA Turkey exhibits strong profitability with a 30% ROTE, significantly outperforming the private banking sector's 20%.
• The tender offer for Sabadell includes a substantial 42% premium on one-month VWAP, which is considerably higher than recent European banking M&A transactions.
• The Sabadell acquisition is estimated to generate 900 million euros per year in steady-state synergies (pre-tax), indicating significant value creation potential.
• Expects the Spanish government's three-year merger ban on Sabadell to be lifted by December 2028, allowing for full integration and synergy realization from 2029.

Negatives

• Customer spread decline is occurring due to falling interest rates, although currently absorbed by activity growth.
• BBVA is not gaining market share in the highly price-sensitive Spanish mortgage market due to aggressive competitor pricing.
• The Sabadell board initially rejected the offer, citing concerns regarding the premium, BBVA's footprint, and Sabadell's standalone dividend distribution.
• The Spanish government imposed a condition requiring Sabadell to remain a separate entity with a separate balance sheet for three years, delaying full integration and synergy realization.
• The USMCA trade agreement is up for renewal in 2026, introducing some uncertainty for Mexico's long-term trade outlook, despite BBVA's overall positive view.

Risks

• BBVA is rate-sensitive in Spain, Mexico, and Peru, meaning continued or steeper declines in interest rates could negatively impact customer spreads and profitability.
• Aggressive pricing by competitors in the Spanish mortgage market could continue to limit BBVA's market share gains in this segment, impacting growth in a key market.
• The Spanish government's condition to keep Sabadell as a separate entity for three years introduces integration delays and execution risks, potentially impacting the timely realization of the projected 900 million euros in synergies.
• The renewal of the USMCA trade agreement in 2026 could lead to changes in trade policies that might affect Mexico's economic stability and growth, impacting BBVA's significant operations there.
• While Turkey is normalizing, the sustained execution of the new economic team's plan is crucial for continued inflation reduction and exit from hyperinflationary accounting; any deviation could impact BBVA's Turkish profitability.
• Currency depreciation, particularly in emerging markets where BBVA operates, can impact reported financial results when translated into current euros, as seen with lending growth figures (e.g., 16% constant vs. 9% current euros).

Future Outlook

BBVA projects an average Return on Tangible Equity (ROTE) of 22% for the 2025-2028 period, driven by continued growth in diversified markets, particularly Mexico, and leveraging its digital capabilities. The company anticipates robust activity growth in its markets, which, coupled with expected stabilization of interest rates, will lead to direct profit growth. BBVA expects to generate 49 billion euros in capital, allocating 13 billion for growth and 36 billion for shareholder remuneration. The outlook for Mexico is positive, with expected upgrades to GDP growth and continued strong lending. Turkey is on a path of normalization, with inflation expected to decline, potentially allowing BBVA to exit hyperinflationary accounting by 2027 or 2028, leading to improved profitability. The Sabadell acquisition is expected to generate 900 million euros in annual synergies, with full integration and synergy realization anticipated from 2029, following the lifting of the Spanish government's three-year merger ban.

Management Comments

• Our job is to deliver. As we discuss with the team, if we deliver the numbers, the market will always catch up.
• To us, there's no need to balance [growth and shareholder remuneration]. They are actually self-reinforcing. It's actually a positive loop that they have.
• As much as possible and as long as it's profitable, we first want to grow... And then, all else being equal, then if there are any – strategically it has to make sense – we might also consider M&A. But there are not opportunities out there. So it's going to be growth and then shareholder payout.
• In the past year and a half, in the past two years, our expectations have improved. Actually, my personal expectations have improved dramatically, because Turkey is on a path of normalization.
• We never, ever wanted to be confrontational with Sabadell in this whole process. So I don't want to be confrontational, even now, even more I wouldn't want to.
• Why do we have two different systems, two different applications to serve the same market? Why do we spend hundreds of millions of euros to develop two things to serve the same market? That is why we have estimated that the synergy of this transaction would be 900 million per year steady state.
• Dividend is not value creation. It's short term versus long term... What matters is the intrinsic value.
• We encourage all the Sabadell shareholders to do their own numbers, por favor, their numbers. Because if they do the numbers, forget our numbers, forget their numbers, they should do their own numbers. In the context of these huge synergies, they would see that they would be getting a lot of value from the transaction.
• The blue-sky scenario would be the trade negotiations. This realization or this conviction that we have, that it's in the benefit of the US for Mexico to have a stable and growing economy. If that is really embraced by the US authorities, there will be positive dialogue on the tariff discussions... If that happens, the potential growth rate of Mexico is much more than 1.4 and 1.7. If that happens, our Mexican business is going to deliver much more than what we have in the plan.

Industry Context

The banking industry, particularly in Europe, is facing increasing fixed costs due to technology investments, driving a trend towards market consolidation. BBVA's tender offer for Sabadell exemplifies this, aiming to achieve significant synergies by eliminating redundant systems and operations. The company's strong focus on digitalization for customer acquisition and service aligns with a key industry trend, where BBVA claims a competitive advantage. The discussion around nearshoring benefits for Mexico highlights a broader geopolitical and economic trend impacting global supply chains and regional economies. The European banking sector is also undergoing consolidation, as evidenced by the comparison of M&A premiums.

Comparison to Industry Standards

• BBVA is number one in profitability (ROTE) and growth among a peer group of the 15 largest European banks.
• BBVA's ROTE in Mexico is 27%, significantly higher than the rest of the Mexican banking industry's 16%.
• BBVA's ROTE in Turkey is 30%, compared to 20% for the private banking sector in the country.
• The 42% premium offered for Sabadell is substantially higher than recent successful unsolicited tender offers in other European markets, which ranged from 13% to 19%.
• BBVA's Risk-Weighted Asset (RWA) density is 50%, which is higher than the peer group average of 29%, making STS securitizations more impactful for BBVA than for other European banks.
• BBVA's digital customer acquisition rate, with two-thirds of new customers coming from digital channels, is presented as a significant competitive advantage, implying it is above the industry average.

Stakeholder Impact

• Shareholders (BBVA): Expected to benefit from 36 billion euros in shareholder remuneration, strong ROTE, and long-term value creation from profitable growth and potential Sabadell synergies.
• Shareholders (Sabadell): Encouraged to tender shares due to a 42% premium and an estimated 25% EPS upgrade post-transaction, despite the Sabadell board's initial rejection.
• Employees (BBVA & Sabadell): Potential for operational changes and integration efforts post-acquisition, especially after the three-year separate entity period, which could lead to workforce adjustments due to synergy realization.
• Customers (BBVA & Sabadell): Expected to benefit from enhanced digital capabilities and potentially broader service offerings, especially for Spanish companies with international subsidiaries.
• Regulatory Authorities: Involved in approving the Sabadell acquisition and monitoring compliance with conditions, particularly the three-year separate entity requirement.

Next Steps

• Continue to deliver on the 2025-2028 strategic plan, targeting 22% ROTE.
• Execute micro-planning and micro capital management to ensure profitable growth.
• Pay back 36 billion euros to shareholders through dividends and share buybacks.
• Continue dialogue with Mexican and US authorities regarding USMCA renewal.
• Monitor Turkey's economic normalization and inflation path.
• Proceed with the Sabadell tender offer, encouraging shareholders to evaluate the intrinsic value.
• Submit a report to the Spanish government before the end of the three-year merger ban period (June 24th, 2028) to prove compliance and argue for lifting the ban.
• Prepare for full integration of Sabadell and synergy realization from 2029.

Key Dates

Recommendation

BBVA demonstrates a robust financial performance track record, clear strategic advantages in diversified, high-growth markets, and a strong commitment to shareholder returns. The new strategic plan targets an impressive 22% ROTE, supported by significant capital generation. The Sabadell tender offer, despite initial board rejection and regulatory conditions, presents substantial synergy potential and a very attractive premium for Sabadell shareholders, indicating a value-accretive move for BBVA in the long term. The positive outlook for key markets like Mexico and Turkey further strengthens the investment case.

Keywords

BBVA, Banco de Sabadell, Tender Offer, Strategic Plan, ROTE, Financial Performance, Mexico Banking, Spain Banking, Turkey Banking, Digitalization, Shareholder Remuneration, M&A, Banking Industry, Nearshoring, USMCA, Corporate Governance