By Geoffrey Smith
Investing.com -- BBVA’s decision to sell its U.S. assets to PNC Financial (NYSE:PNC) looks like a win-win transaction, but the Spanish bank looks to have the better side of it.
The 9.7 billion ($11.6 billion) price that BBVA (MC:BBVA) has squeezed out of PNC is something that no bank analyst thought likely. According to slides put out by BBVA on Monday, the average value attached to the franchise – with over $100 billion in assets – was 3.8 billion euros, and no-one valued it higher than 6 billion.
The actual price is equivalent to 45% of BBVA’s market value as of Friday’s close.
You can read that whichever way you want: BBVA would argue that the deal just shows that its shares were trading at an unjustified discount because of the well-documented problems of sub-zero interest rates in the euro zone, and the fact that the Covid-19 pandemic has hit Spain harder than many other European economies.
Cynics would argue back that the deal is actually a decent reflection of market realities, and that the bank’s core franchises in Spain has been deeply scarred by the pandemic, while its operations in Brazil, Mexico and Turkey all face challenges of varying severity (again, many of them pandemic-related).
Certainly, it’s hard to see much European bank M&A taking place at a multiple of nearly 20 times earnings. Even in the U.S., that would have been more difficult without the sharp steepening in the yield curve since Pfizer’s vaccine announcement. But in the euro zone, where the European Central Bank is preparing to stamp down heavily on any sign of life in long-term term interest rates, BBVA has very little chance of restoring its lending margins any time soon.
This isn’t to say the 15% rise in BBVA’s share price on Monday isn’t justified. The deal adds nearly 300 basis points to BBVA’s core tier 1 capital ratio, a key measure of financial strength, to 14.46%. That positions it very nicely for any cyclical recovery next year.
The question is – how best to deploy the excess capital?
The rise of over 15% in Banco de Sabadell's (OTC:BNDSY) share price on Monday shows how the Spanish market thinks it will be spent. Sabadell is an obvious takeover target for its lack of scale, and the recent Caixabank-Bankia merger has made domestic scale a more pressing issue for BBVA.
Theoretically, buying Sabadell should add value: before this morning’s rise, its shares were trading at only 11% of book value, according to Investing.com data. Even after the rally, there is an obvious opportunity to buy at a huge discount to what Sabadell could be worth in a healthier economic environment.
But would that be the best deal for BBVA shareholders? The bank was at pains to stress that it is keen to increase distributions to shareholders, “with a sizeable buyback as an attractive option at current share prices” (BBVA’s own shares only trade at 0.36x book, after all).
The trouble with a buyback is that it can only happen once European banking supervisors have lifted their ban on payouts, and it is no secret that European banking supervisors put a higher priority on avoiding bank failures on their watch than on seeing shareholders get paid. Expect them to lean on BBVA to clean up Sabadell first.