Breakingviews - BBVA need not spend all its U.S. winnings on M&A

BBVA Chairman Carlos Torres Vila speaks in Mexico City, Mexico June 11, 2019.

LONDON (Reuters Breakingviews) - Caution is the better part of BBVA’s M&A valour. The Spanish bank has confirmed takeover talks with smaller domestic rival Banco de Sabadell. Even after a deal, boss Carlos Torres will have plenty of capital to spare. Mexico, not Turkey, offers a better chance of higher returns.

Torres is nothing if not fleet-footed. The same day he agreed a 9.7 billion euro sale of BBVA’s U.S. unit - at a chunky premium to book value – takeover talks were confirmed with Sabadell. A union would nearly double BBVA’s market share in Spain to 20%, according to Morgan Stanley analysis. Any price is likely to be cheap too: even after a 27% rise in the past five days on rumours of an imminent offer, Sabadell shares still trade at barely one-quarter of tangible book value. And if BBVA can cut 42% of its target’s costs, broadly in line with Caixabank’s proposed union with Bankia, savings net of 3.4 billion euros in restructuring costs could amount to 6.3 billion euros once taxed and capitalised.

Assuming BBVA pays a one-fifth premium, valuing Sabadell’s equity at 2.9 billion euros, Torres would have a meaty common equity Tier 1 ratio of 13.1% after the American disposal. That amounts to 4.2 billion euros in spare capital above a 12% minimum CET1 threshold. If BBVA decides to offload Sabadell’s UK operations, that war chest would get even bigger.

Expanding in Turkey, which accounts for 16% of BBVA’s group profit, is tempting. Shares in Garanti, the local bank in which Torres holds a 49% stake, have declined by 22% this year. A takeover at a one-quarter premium would cost 2.7 billion euros, meaning a fair amount left over for Torres’ stated intention of share buybacks once regulators allow.

Still, Mexico is a better use of the cash. BBVA already holds 23% of the loan market. Deploying capital there, as Spanish rival Banco Santander is doing, would consolidate its leading position. Moreover, returns on equity of 24% last year were roughly double those in Turkey.

BBVA shares slumped 5% on Tuesday, as often happens if investors fret about a spate of value-destructive M&A. Torres could reassure them by indicating that Sabadell could be his last deal for a while.


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