LONDON/NEW YORK (Reuters Breakingviews) - European immigrants historically moved west to seek their fortune. Spanish lender BBVA is taking the opposite path after selling its U.S. subsidiary to PNC Financial Services for $11.6 billion in cash. The transaction enables boss Carlos Torres to turn thankless toil into shareholder gold. Wandering peers Banco Santander and HSBC, may struggle to repeat the trip.
The sale represents a painful reversal of BBVA’s efforts to develop its western frontier after spending $9.6 billion on Compass Bancshares in 2007. Strategically, however, it makes sense. A spike in bad debt charges has knocked the U.S. division’s earnings by three-quarters this year, reducing its annualised return on tangible equity to around 2%, according to Breakingviews calculations. Yet while the pandemic has squeezed U.S. regional bank valuations, they remain much higher than in Europe. PNC is paying BBVA the equivalent of 1.3 times the unit’s tangible book value.
The windfall solves BBVA’s capital conundrum, lifting its common equity Tier 1 capital ratio from 11.5% to 14.5%. That puts the Spanish group in line with the European industry average and about 250 basis points ahead of domestic rival Santander. Torres plans to return some of the cash to shareholders, once regulators allow. But the sale also lets him play the kingmaker in a consolidating Spanish market, for example by snapping up struggling Banco de Sabadell.
Other European lenders with subscale American units should follow suit and up sticks. Banks such as Santander and HSBC argue the United States provides them with an important source of earnings diversification. But both lenders garner less than a tenth of their overall profit from their stateside operations. Besides, the businesses struggled to earn a respectable return even before the pandemic. Santander and HSBC’s local operations earned returns on tangible equity of 5% and 1.5%, respectively, in 2019.
A sale similar to BBVA’s would be welcomed by shareholders, who pushed the Spanish group’s shares up 15% on Monday morning. But there’s a shortage of suitable buyers. PNC had bagged $17 billion from the sale of its 22% stake in asset management giant BlackRock earlier in the pandemic, giving it an enviable treasure chest. Most other American lenders are under pressure from regulators to preserve capital, while legislators are sceptical of bank consolidation. BBVA’s rivals may find it harder to retreat to the Old World.
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