Mix-driven cost of risk increase

The quarter showed an unexpected cost of risk increase. However, this was largely attributable to the accelerated change in the group’s business and geographical mix, thus having no impact on the group’s best-in-class profitability power.

Upgraded profitability targets

Once again, the group exceeded both management and consensus expectations. As a result, the management upgraded its 2024 profitability guidance to levels corresponding to investors’ pre-2008 requirements, thus suggesting that the cost of the regulatory tightening has been fully passed on to customers.

Still ahead of plan

Once again, the group beat not only consensus expectations but also its own forecasts, thanks to a very strong top-line momentum supported notably by ongoing net interest margin improvement and past inflows. Although the group managed to fully invest retained earnings, excess capital increased further driven by welcomed one-off tailwinds.

Inflation's miracle

BBVA is surfing on inflation which has supported the expansion of its indexed loan book, boosted further by market share gains in Mexico and a favourable change in the loan book mix. Such a dynamic is expected to repeat, albeit at a slower pace, in 2023, for shareholders’ happiness.

Running ahead of profitability expectations

The group posted record quarterly results ahead of the consensus but also the management’s own expectations which could force the latter to upgrade its already aggressive mid-term RoTE target.

At full speed

The group posted an astonishing set of results as it continued to grow its business aggressively in all markets to take advantage of profitable business opportunities. While the current profitability level is not fully sustainable, it signals that the group’s ambitious 14% RoTE objective for 2024 is achievable.

Record profits and confirmed ambitious long-term goals

The group posted its highest quarterly recurrent results ever. While the trading boost will not recur, the net interest income momentum and the resilience of the high fee generation will support the management’s ambitious long-term financial goals provided central banks manage to control the accelerating inflation without sparking a recession.

Upgraded payout commitment

The fourth-quarter performance enabled management to reiterate its 14% RoTE objective for 2024 and to increase its cash payout commitment. However, it is worth noting that it has made no changes to its 9% annual total return guidance (10% in 2021), which weakens the enthusiasm as it stands below the group’s cost of equity.

In for a penny, in for a pound

BBVA’s decision to take full control of Garanti Bank is probably the best thing to do in the absence of an alternative solution. However, it is unlikely to be greeted by the market which remains unconvinced by the rationale of the group’s presence in Turkey.

Net interest margin recovery and benign asset quality trends

The third-quarter profits exceeded expectations not only on a lower cost of risk but, more importantly, on an impressive net interest margin recovery driven by international operations. The end of regulatory limitations will enable the group to return accumulated excess capital to shareholders over the coming months.

Provision recoveries offset by negative equity adjustments

The quarter enjoyed a benign cost of risk. However, regulatory headwinds and negative equity adjustments weighed on the CET1 underlying generation.

Stronger trading gains and accelerated cost of risk normalisation

The quarter was marked by the deconsolidation of the US operations, albeit the accretive impact on the capital position still has to be factored in. It enjoyed strong CIB revenues and accelerated cost of risk normalisation.

On track to resume normal capital distribution

The group’s fourth-quarter results were broadly in line with expectations, translating into strong equity generation based on very resilient profitability. Management remains committed to resuming dividend payments on a 35-40% payout ratio as soon as this year complemented with share buy-backs. We expect the group to continue to perform well in July’s stress tests which will be pivotal for the ECB’s final decision expected in September.

Merry Christmas !

BBVA’s management made it clear that PNC’s offer was unexpected, thus confirming that a price is a subjective concept. The valuation gap confirms that BBVA’s divestment makes sense as the group would not have been able to generate as much value by itself.

Upgraded guidance

The group’s CEO made reassuring comments at BofA’s annual conference and upgraded the full-year guidance, thus reinforcing our view that the stock’s sell-off is partly undeserved.

Morning Note – 22 April 2024

Benefits of scale set to materialise

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Witan

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