The never-ending widening in the net interest margin

Once again, the market’s fears over the sustainability of the net interest margin have proven misplaced as confirmed by the quarterly surprise and the group’s updated guidance for 2024.

Interest rate tailwinds or greedflation ? That is the question

The management has upgraded its 2023 expectations and is likely to do the same for 2024 in the first quarter of next year. This reflects a slower-than-expected deposit repricing which could be less accidental than officially stated, paving the way for a more resilient recovery in profitability.

Upgraded 2023 guidance

The quarter enjoyed stronger net interest rate tailwinds and more resilient asset quality trends, thus enabling the management to upgrade its full-year guidance.

Top-line surprise but no expected upgrades

The fourth quarter results enjoyed a stronger-than-expected net interest margin recovery. The Euribor tailwind will remain very strong this year. However, this will be mitigated by weaker non-interest income, strong cost inflation, and an increased cost of risk.

The best possible world

Like its peers, the group has enjoyed the full benefit of interest rate hikes without having to share this with employees and depositors, or book provisions for an asset quality deterioration. The management believes that these ideal operating conditions will largely recur in 2023.

Stronger fee income generation, benign cost of risk

While the quarter showed strong fee income generation, the earnings beat was also attributable to non-sustainable factors, thus limiting the upgrade potential in our view.

Dance on a volcano ?

Like many of its peers, CABK views the current environment as the best in the world, as if the only potential outcome of the escalating tensions between the West and the East was the end of negative interest rates. Not only the group’s view is already largely factored in the consensus expectations (and ours), but it could prove too optimistic in our view.

Confirmed guidance

In our view, the underlying quarterly trends were in line with expectations thus enabling the management to reiterate its full-year guidance.

Strong fee income generation

The fourth quarter operating trends are in line with the group’s 10% RoTE objective set for 2022 (without any interest rates support). Ongoing strong fee income generation, merger-related cost savings and the benign cost of risk will help absorb net interest margin headwinds.

Disappointing activity, better asset quality trends

The quarter exceeded expectations on lower loan impairments but slightly disappointed on the top-line front driven by low activity levels.

Improved cost of risk guidance and cost synergy expectations

The quarter enjoyed a particularly benign cost of risk, leading management to improve its full-year guidance. Last but not least, merger-related cost synergies have been increased by 22%.

Ongoing wealth management momentum and benign cost of risk

The quarter enjoyed ongoing wealth management momentum and a faster-than-expected cost of risk normalisation. This bodes well for the future earnings trajectory which will be boosted by confirmed cost and revenue synergies.

Strong wealth management and efficiency gains

The group posted a strong set of results, driven by strong wealth management momentum and impressive efficiency gains. Next month, CaixaBank will start consolidating Bankia which itself showed encouraging top-line momentum.

Morning Note – 22 April 2024

Benefits of scale set to materialise

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Witan

Business as usual for WTAN’s executive team, while the board reviews investment management arrangements…

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