425: BBVA CEO Discusses Sabadell Bid, Capital, and Growth Outlook

BBVA's CEO detailed the strategic rationale for the Banco Sabadell tender offer, capital allocation priorities, and resilient growth prospects across key markets.

Summary

• BBVA has opened the acceptation period for its tender offer for Banco Sabadell, emphasizing in-market consolidation due to rising technology costs, which represent 33% of BBVA Spain's costs, totaling €1.1 billion annually.
• The offer projects approximately €900 million in pre-tax synergies, a substantial amount compared to Sabadell's expected €1.6 billion profit.
• The offer includes a 30% premium to Sabadell's undisturbed price and a 42% premium versus the one-month VWAP when initially launched, which is significantly higher than premiums seen in other unsolicited offers (13-19%).
• Sabadell shareholders are estimated to receive a 25% EPS upgrade if the acquisition is successful.
• In the event the Sabadell deal does not proceed, BBVA has a standalone plan to return €36 billion in excess capital to shareholders over the next four years (2025-2028).
• BBVA's capital allocation strategy prioritizes organic growth (above cost of equity), followed by share buybacks (due to no execution risk), and then M&A (if strategically and financially sound, favoring in-market consolidation).
• The bank maintains a 13.3% CET1 ratio and has achieved the highest Return on Tangible Equity (RoTE) among the 15 largest European banks, alongside a Total Shareholder Return (TSR) of 397% since early 2019.
• Spain is expected to achieve low to mid-single-digit revenue growth (3-5%), supported by robust GDP growth (3% last year, 2.5-3% this year), immigration, a service-based economy, and €165 billion in Next Generation EU funding; BBVA has gained 30 basis points market share annually in Spain over the last three years.
• Mexico's banking sector debt over GDP is low at 33%, indicating significant growth potential, and BBVA Mexico holds dominant market shares of 44% in payroll accounts and 39% in acquiring (POS machines).
• Mexico's economy is outperforming expectations, with exports up 4% and FDI up 8% in the first six months of the year, potentially avoiding a previously forecasted recession.
• Turkey is guided to contribute 10-12% of group net profit through 2028, contingent on macro stabilization, with official inflation targets of 28.5% (this year), 16% (next year), 9% (2027), and 8% (2028); BBVA Turkey is considered the best bank in the country by returns.
• BBVA targets a 22% RoTE, having already delivered 20%, and aims to deliver €36 billion in excess capital, representing over 40% of its €90 billion market cap over four years.
• Net profit is expected to grow steadily from next year, averaging €12 billion over the medium term (within a €10-14 billion range), as activity growth directly impacts the bottom line with normalizing interest rates.
• Mexico's asset quality is robust, with cost of risk performing better than guidance, supported by economic performance and declining rates.

Sentiment

Score: 8

Explanation: The overall sentiment is highly positive, driven by strong financial performance, strategic M&A rationale, robust capital management, and optimistic outlooks for key markets like Spain and Mexico. While there are risks, particularly with the Sabadell offer and Turkey's macro environment, management expresses confidence in their ability to deliver value and manage these challenges. The company's leading position in RoTE and TSR further reinforces this positive outlook.

Positives

• Significant synergy potential of €900 million from the Banco Sabadell acquisition, representing a substantial portion of Sabadell's expected profit.
• Attractive premium offered to Sabadell shareholders (30% vs. undisturbed price, 42% vs. one-month VWAP), significantly higher than comparable unsolicited offers.
• Projected 25% EPS upgrade for Sabadell shareholders if the deal is completed.
• Commitment to return €36 billion in excess capital to shareholders over four years (2025-2028) in a standalone scenario, representing over 40% of current market capitalization.
• Strong capital discipline maintained with a 13.3% CET1 ratio.
• BBVA holds the highest Return on Tangible Equity (RoTE) among the 15 largest European banks, currently at 20%.
• Exceptional Total Shareholder Return (TSR) of 397% since early 2019, significantly outperforming European and Spanish banking averages.
• Robust growth outlook for Spain with low to mid-single-digit revenue growth (3-5%), driven by strong GDP, immigration, and substantial EU funding (€165 billion).
• BBVA is consistently gaining market share in Spain, averaging 30 basis points annually over the last three years.
• Mexico's banking sector has low debt over GDP (33%), indicating considerable room for healthy growth without excessive risk.
• BBVA Mexico possesses dominant and resilient market shares in payroll accounts (44%) and acquiring (39%).
• Mexico's economy is outperforming expectations, with 4% export growth and 8% FDI growth in the first half of the year, potentially avoiding a previously forecasted recession.
• BBVA Turkey is positioned as the best bank in the country in terms of returns and franchise strength, expected to deliver value even in challenging conditions.
• Diversified business model across multiple countries provides resilience and growth opportunities.
• Leading market positions (number one or two) in core countries like Mexico, Turkey, Peru, and retail banking in Spain.
• Strong digital capabilities are driving higher client acquisition and enhancing the franchise.
• Net profit is expected to grow steadily from next year, not as a 'hockey stick,' due to activity growth flowing directly to the bottom line as interest rates normalize.
• Robust asset quality in Mexico, with cost of risk performing better than expectations due to favorable economic conditions and declining rates.

Negatives

• The Banco Sabadell tender offer is unsolicited and faces the risk of non-acceptance by shareholders.
• If the Sabadell deal does not materialize, BBVA will forgo the specific synergies and strategic benefits of the merger.
• Turkey's guided contribution to group net profit (10-12%) is dependent on macro stabilization, and official inflation targets are described as 'a bit optimistic' by management.
• BBVA currently trades at a discount to the sector despite its strong performance metrics.
• Mexico faces potential headwinds from FX volatility, lower rates, and rising competition.
• The USMCA renegotiation presents a potential, albeit expected to be positive, risk for Mexico's economic stability.

Risks

• Non-acceptance of the tender offer by Banco Sabadell shareholders.
• Inability to fully realize the expected benefits and synergies from the Sabadell transaction.
• Limitations on information about Banco Sabadell to which BBVA has had access prior to completion.
• Macroeconomic instability in Turkey, potentially impacting the guided contribution to group net profit if inflation and rates do not fall as planned.
• FX volatility, lower rates, and rising competition in Mexico.
• Uncertainty and potential negative outcomes from USMCA renegotiations.
• General risks detailed in the Registration Statement on Form F-4 and BBVA's annual reports on Form 20-F and current reports on Form 6-K.

Future Outlook

BBVA expects low to mid-single-digit revenue growth in Spain (3-5%) driven by robust economic factors. In Mexico, high single-digit loan and revenue growth is anticipated with declining cost of risk, supported by low banking penetration and a strong franchise. Turkey is guided to contribute 10-12% of group net profit through 2028, contingent on macro stabilization and disinflation. Overall net profit is projected to grow steadily from next year, averaging €12 billion over the medium term, as activity growth directly impacts the bottom line with normalizing interest rates.

Management Comments

• "In-market consolidation is ultra-relevant, in our view, in an industry where the costs are going up, in an area where it is mostly fixed costs, which is technology."
• "900 million of synergies is big. This is pre-tax, obviously. 900 million as compared to the profit base of Sabadell, which is 1.6 billion they are expecting. 900 million is a lot of money."
• "With regard to the undisturbed price, we offered a 30% premium... When we launched the offer, it was a 42% premium versus the one-month VWAP of the undisturbed price."
• "Our EPS earnings per share upgrade that we are estimating for a Sabadell shareholder... its 25% EPS upgrade. So, its a great deal."
• "If this deal happens, fine, because it makes sense. But if it doesnt happen, fine also. We also announced at the end of July our standalone plan: 36 billion excess capital return in the next four years to our shareholders. Amazing plan, in our view."
• "Organic growth, all else being equal... comes number one. Then we go share buyback... And then, if it makes strategic sense and in that context, we like domestic consolidation... then you can do M&A."
• "As a bank, we have the highest return on tangible equity in Europe among the 15 largest European banks. BBVA is number one."
• "If you look into the 100 that you put into BBVA stock at the beginning of 2019... the 100 today is 397."
• "Spain is doing really well as a country. So, GDP growth is quite robust for three or four reasons: immigration, service-based economy, and Next Generation EU funding."
• "Banking sector debt over GDP is 33% in Mexico. This is one of the lowest levels even in the emerging markets landscape."
• "In Mexico, we have 44% market share in payroll accounts... We have 39% market share in acquiring... Its very tough to replicate this market advantage."
• "It's in the best interest of the USA to keep Mexico fine, to have Mexico in an okay situation... you would want a stable, okay environment, and you would want the benefit of Mexico."
• "The labor cost of Mexico, on average, versus the labor cost in a low-cost state in the US Indiana... its one seventh."
• "As long as the team, the minister and the team that is in charge of the economy today, as long as they continue to do exactly what they have been doing, I see that possibility of Turkey and Turkey going off rails much lower."
• "Our focus is to make sure that we maintain this competitive advantage that we are the best bank in the country in terms of returns, in terms of franchise."
• "What differentiates BBVA? Number one: we are diversified... Number two: in the core countries that we operate, we are either number one or number two... Number three: we are very good in digital."
• "Its not going to be a hockey stick. Its not for a very different fourth year and so on. Its an increasing curve because of the dynamic that I just explained."
• "The core thing is business-as-usual regular provisioning. And on that one, what we are seeing is that its quite robust, quite positive better than our guidance, better than our expectations."

Industry Context

The banking industry faces rising fixed costs, particularly in technology, making in-market consolidation a strategic imperative for scale and synergy realization. BBVA's focus on digital capabilities aligns with broader industry trends towards digital transformation and customer experience. The discussion highlights the varying economic dynamics across European and emerging markets, with Spain benefiting from EU funding and a service economy, while Mexico's low banking penetration offers significant growth potential. Turkey presents a higher-risk, higher-reward scenario dependent on government policy. BBVA's strong performance metrics (RoTE, TSR) position it as a leader among European banks, despite a market valuation discount.

Comparison to Industry Standards

• BBVA's 42% premium offered for Sabadell (vs. one-month VWAP) compares very favorably to other unsolicited tender offers in Italy, which saw premiums of 13%, 14%, and 19%.
• BBVA has the highest Return on Tangible Equity (RoTE) among the 15 largest European banks, currently at 20% (with a goal of 22%).
• BBVA's Total Shareholder Return (TSR) of 397% since early 2019 significantly outperforms the European banking average of 220% and Spanish banks' average of 200% over the same period.
• Mexico's banking sector debt over GDP at 33% is one of the lowest in emerging markets, lower than Peru, Colombia, and Brazil (72%).
• BBVA Mexico's market shares in payroll accounts (44%) and acquiring (39%) are described as 'unique' and 'very tough to replicate' compared to competitors.
• Mexico's labor cost is one-seventh of a low-cost US state like Indiana, providing a significant competitive advantage for companies operating there.

Stakeholder Impact

• Shareholders: Potential for significant EPS upgrade if Sabadell deal closes, or substantial capital return (€36 billion) in a standalone scenario. Strong TSR performance and high RoTE indicate value creation.
• Banco Sabadell Shareholders: Offered a significant premium (30-42%) and a projected 25% EPS upgrade if they accept the tender offer.
• Employees: Potential for synergies and consolidation in Spain if the Sabadell deal proceeds, which could imply workforce adjustments, though not explicitly stated.
• Customers: Benefits from BBVA's strong digital capabilities and leading market positions, potentially leading to better services and offerings.
• Creditors: Strong capital position (13.3% CET1) and robust financial performance enhance creditworthiness.

Next Steps

• Continue the acceptation period for the Banco Sabadell tender offer.
• Execute the standalone plan to return €36 billion in excess capital to shareholders over 2025-2028 if the Sabadell deal does not proceed.
• Continue to grow organically in profitable areas.
• Monitor and adapt to macroeconomic developments in Spain, Mexico, and Turkey, including interest rate normalization and inflation paths.
• Continue to deliver on financial targets, including RoTE and net profit growth.

Key Dates

Recommendation

The filing presents a compelling investment case for BBVA. The strategic rationale for the Sabadell acquisition, with substantial synergies and a significant EPS upgrade, offers a clear path to enhanced value. Even without the acquisition, the commitment to return €36 billion in excess capital (over 40% of current market cap) demonstrates strong shareholder focus and capital discipline. BBVA's consistently high Return on Tangible Equity (RoTE) and exceptional Total Shareholder Return (TSR) compared to European peers highlight superior execution. The diversified geographic footprint, with leading positions in high-growth markets like Mexico (low banking penetration, strong franchise) and a recovering Spain, provides resilience and growth drivers. While Turkey presents macro risks, BBVA's strong local franchise is expected to mitigate impact. The company's digital leadership further strengthens its competitive advantage. The current market discount, despite strong fundamentals and clear growth trajectory, suggests an undervaluation that is likely to correct as the company continues to deliver on its ambitious targets.

Keywords

BBVA, Banco Sabadell, tender offer, M&A, banking, Spain, Mexico, Turkey, financial results, capital allocation, dividends, share buyback, CET1, RoTE, TSR, digital banking, risk management, SEC filing, financial services, European banking, emerging markets