The new roadmap of BBVA and Sabadell

There will be no merger between BBVA and Sabadell. At least for now. But the pressure of the crisis and of the regulators remains and the future alone does not look very promising for both banks. Especially for Sabadell. In his statement to the CNMV, the entity chaired by Josep Oliu points out that he wants to sell TSB, the British subsidiary for which he paid 2,300 million euros in 2015 and which has cost him much more due to computer problems and reputation in the United Kingdom. However, the ‘Brexit’ and, above all, the non-existence of an agreement for the exit of that country from the European Union, eliminate from the beginning the interest of other European banks for TSB and reduce possible buyers to British entities. All of this suggests that if Sabadell sells TSB, it will be at a loss.

Regulators pushed the entities to merge. The statements of Luis de Guindos, vice president of the European Central Bank, are not forgotten after the stress tests at the end of 2018, when he assured that BBVA and Sabadell, together with other European banks, should increase their strength and improve capital positions to face future challenges and therefore “would be closely monitored.” The opinion of the ECB and the Bank of Spain has not changed: mergers are a way to deal with the low profitability of the banking sector.

The history of the banking sector is a history of mergers. Gone are the years when rivals such as Banco Bilbao and Vizcaya joined to give rise to BBV, which would later incorporate the A for Argentaria. At that stage, unity was strength. Now, the mergers are all defensive, in an attempt to lift the battered profitability of financial institutions due to the prolonged period of low interest rates – which will continue at least until the end of 2024, as anticipated by regulators – and to which an increase in bad debts and problematic assets is coming from the impact of the coronavirus crisis.

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It is in this context that the failed merger attempt between BBVA and Sabadell is framed. Sabadell’s profitability (measured in ROTE terms) has plummeted in one year from 8.58% to 1.85%, while that of BBVA has fallen by half: from 12.2% in September 2019 to 6.9% in the third quarter of this year. The provisions they had to make due to the lower value of goodwill and the expected increase in non-performing loans explain this collapse. But this is not going to change; the Bank of Spain has already warned that business delinquencies will grow next year and the markets value banks less and less. With this scenario, the large portfolio of loans to SMEs that Sabadell keeps on its balance sheet seems more like a problem than a treasure.

Insufficient redemption

The operation has ended without an agreement because Sabadell has not found the exchange offered by BBVA sufficient, both in the price of its securities and in the management positions it would have in the resulting entity. But when alliances are made between a large fish and a smaller one, the fusion becomes an absorption. The difference in size between the two entities is very significant: BBVA is three times as large as Sabadell, since it has 727,014 million euros in assets compared to 236,094 million of the entity chaired by Josep Oliu.

After the talks, Sabadell announces that it will focus on its market in Spain and will try to sell TSB, while the future of BBVA also goes through a certain retreat after selling its subsidiary in the United States and indicating that it does not intend to increase its participation in Garanti, the Turkish bank where it controls almost 50% of the capital. But its CEO is Turkish and that discard of Turkey may change. It is true that, today, this country is problematic, but it is also true that the level of banking of its 82 million inhabitants is very low compared to mature markets such as Spain, which leaves a lot of room for developing the banking business there pure for years to come. BBVA may use part of the money from the American sale to buy back shares – which would give shareholders immediate joy – but that is not a medium or long-term plan.

In any case, it would not be the first time that a courtship is resumed after breaking up for the first time. This is what happened with Liberbank and Unicaja, which a year after failing in the first merger attempt have returned to negotiate. Because necessity is a good incentive and retreating to the domestic market – too mature and not very profitable – does not seem like a bet for the future.

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