Faced with a hostile takeover of Banco Sabadell with an uncertain future, the star sector of the Spanish stock market can gain more momentum: BBVA, CaixaBank and Santander can still rise at a double-digit rate.

BBVA's takeover bid for Banco Sabadell, which values ​​the latter entity at 12.2 billion euros, opens a battle that could be long and complex and will impact the entire star sector of the stock market in 2024.

With many ingredients in the cocktail, the big question now is whether there is any bullish potential left for Spanish banks in the run-up to the beginning of the change in the monetary cycle in Europe and after registering an almost perfect 2024 financial year on the stock market. The Ibex 35 Banks index rose 26.2% and, after just over a third of the year, it almost equaled last year's 27.76% increase, the best since this indicator was created.

Barring a major surprise, the banking index will close the fourth consecutive year of gains. A period in which an extraordinary 125% has revalued in the heat of the rise in interest rates in the euro zone to the current 4.5% and aggressive shareholder remuneration policies through the double means of dividends and share buybacks.

“A favorable macro environment and moderation in interest rate cuts could maintain the momentum of the improvement in banks' profitability (a return on equity in 2024 is estimated at 13.8% compared to 12. 05% in 2023) which, in turn, could boost the value of its shares in the stock market. Additionally, the sector's ability to sustain high shareholder remuneration, with an average payout of 35% and a dividend yield. of 6% continues to be key in the sustainability of current valuations,” says Javier Bernat, of GPM.

Challenge

However, Bernat recalls that “exceeding historical highs is a considerable challenge, especially given that a price-to-book ratio of 0.95 times suggests that shares are approaching the highest levels of the last decade.”

The bulk of large firms are optimistic. At this time, they believe that three Ibex banks, BBVA, Banco Santander and CaixaBank, have double-digit upside potential and, more specifically, at least 15% (see graph).

Pending the development of events following the takeover bid launched for Banco Sabadell, the average target price for BBVA stands at 11.46 euros. Therefore, BBVA would have an 18% rise ahead of it, which would mean smashing new all-time highs.

His offer on Sabadell has totally changed his fixed photo on the trading floor. At the start of the year, BBVA led the Ibex 35 banks on the Stock Market with a large rise of 33% to 10.98 euros.

But since the negotiations with Sabadell became known, the stock has fallen almost 11% and the entity is the one that has risen the least on the stock market so far this year.

Rally

On the other side of the scale is precisely Sabadell. The 7.6% rally experienced by the stock since BBVA's interest became known has lowered the entity's theoretical upside potential to 5.9% with respect to the average target price of 1.98 euros of the analyst consensus collected by Bloomberg . (See page 19)

While Sabadell looks for the best formula to defend itself from BBVA's hostile attack, analysis firms divide their opinions on the impact of the hostile offer.

“We believe that the operation makes sense and that Sabadell's shareholders are the ones who will benefit the most. We estimate that Sabadell's earnings per share would increase around 25%, while BBVA's would improve around 5%,” they point out. Banco Santander analysts, who give BBVA a target price of 11.6 euros, with a potential of 19.4%, while in the case of Sabadell it is 20% to 2.26 euros.

Mediobanca believes that the moment chosen for the takeover bid is explained “because it makes sense, synergies and complementary franchises. Now the macro context is more stable and predictable than three years ago. Sabadell is in much better shape, it has strengthened the balance sheet and its returns are much higher,” says the entity, with a recommendation of neutral in both entities.

Pending the development of the takeover bid, whose conditions many analysts consider insufficient (“it is unlikely that the takeover bid will go ahead under these terms because it offers a simple exchange of shares,” says Ramón Forcada, director of Analysis and Markets at Bankinter), Sabadell offers an impressive performance on the Stock Market in the last 12 months, in which the price rises 104%. An advance only surpassed by the 128% of Monte dei Paschi.

None of Sabadell's Spanish competitors reach that high in that period, nor so far this year. In 2024, Sabadell's stock rises 68%, in a scenario in which the entire European bank has the tailwind.

“This environment of sticky inflation and delay in raising rates benefits the sector,” explains Borja de Castro, of Banco BIG, who however warns of the future impact of lower interest rates on balance sheets.

For now, the sector is cruising at cruising speed and, as CreditSights points out, banking profits have soared without banks having to set aside capital to offset higher risk-weighted assets.

As a whole, firms continue to prefer European banks over the rest of the sector globally. This is the case of JPMorgan, which assures that “the more we compare Europe with the rest of the world, European banks seem relatively more attractive in most aspects, since they are quoted at a PER (times in which the earnings per share are contained in the price per share) of 7.3 times and offer a return on tangible capital of 12.6% estimated until 2026”. (See page 4).

preferences

Preferences that translate into strong increases in European banking in which Spanish entities are the driving forces. The list of national banks that far exceed the average profit of 23% of the Euro Stoxx Banks in 2024 extends to all entities; except BBVA.

Despite a gain of 32% so far this year, CaixaBank still retains a theoretical upside potential of 15% to 5.69 euros per share, which means it could shatter the all-time highs set last April by a wide margin. at 5.11 euros.

Citi, which gives the bank owned by the State a target price of 6.10 euros per share, believes that by ratios the value remains attractive “after the entity has reiterated its profit objective and that it will distribute 4.6 billion euros among its shareholders. euros between dividends and share buybacks in the next 12 months”.

For his part, Javier Bernat recalls that CaixaBank and Bankinter “present more attractive options (on the stock market) due to their solid shareholder remuneration policies and potential to improve their profitability.”

Bankinter also exceeds the average rise of European banks this year with a gain of 30.6%. The entity once again improved consensus forecasts with the results for the first quarter of the year.

Analysts give it a price target of just over 8 euros, which would mean it could gain 7% from current levels.

Like Bankinter, Unicaja has been sounded these days as a possible candidate for a corporate operation if the takeover bid for Sabadell does not go ahead. “It could be one of the aces up the sleeve of BBVA, which has to be considering alternatives. Neither Bankinter nor Unicaja would give it the quota it would get with Sabadell, but they are interesting options,” explains Manuel Pinto of XTB.

Santander tour

The third entity with double-digit potential is Banco Santander, to which analysts assign an upward potential of 15% to 5.44 euros. The doubts raised by the impact of the takeover bid on Sabadell on BBVA's ratios may favor Santander's interests on the stock market, since the two most liquid Spanish banks regularly compete for the favor of large global institutional investors.

Despite the punishment suffered in May, BBVA continues to exceed Santander's 50% gain in the last 12 months. HSBC remembers that the valuation gap has been reduced and is betting on the bank chaired by Ana Botín over BBVA. “Trading at six times the estimated 2025 PER, Santander shares appear cheap,” says the entity, which also highlights that the entity's large business figures in Brazil are improving.

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