The battle of the banks in Spain: BBVA narrows the gap with Santander – March 25, 2024 at 6:33 p.m.

* BBVA reduces the value gap with its rival Santander

* Rivalry shows how investors reward banks in era of high rates

* Rivalry shows how investors reward banks in era of high rates

Rivalry shows how investors reward banks in era of high rates * CFO says Santander will prosper as rates fall

(Added BBVA downgrade by Barclays and Santander upgrade to paragraph 18, updated shares to paragraphs 21 and 22)

MADRID, March 25 (Reuters) – BBVA's share price has more than tripled since the end of 2020, narrowing the valuation gap with Santander and highlighting a divergence in fortunes between Spanish banks that could be short-lived.

Both banks trace their origins to 1857 and neighboring towns in northern Spain, but Santander has become the dominant bank in Spain with more than twice the assets of BBVA and, until very recently, a market capitalization much larger important.

But the gap has narrowed from 20 billion euros ($22 billion) three years ago to around 5.5 billion euros, raising the question of who has adopted the right strategy .

The shift reflects how investors are rewarding banks that share more of their resurgent profits than those that prioritize investments in future growth, as well as those that have made the right bets outside Europe, whose growth is slower.

Shares in BBVA, which is worth some 64 billion euros compared to Santander's 69.5 billion euros, have been supported by its Mexican subsidiary, which holds about a quarter of the retail market.

“BBVA has one of the best retail banking franchises in all emerging markets in Mexico and its results are even better than those in Brazil for Santander,” said Enrique Quemada, president of investment bank ONEtoONE Corporate Finance Group .

Investors also rewarded BBVA for its decision to exit the United States in November 2020 to focus on distributing more cash to shareholders, analysts and investors told Reuters.

“The market continues to reward us for growth, profitability, increased dividends and share repurchases,” BBVA Chairman Carlos Torres told shareholders this month.

Torres has been president since late 2018, when Onur Genç became CEO of BBVA.

Since 2021, BBVA has distributed €13.19 billion to shareholders, including extraordinary buybacks of €4.16 billion. This is equivalent to 20.6% of its current market valuation, Reuters calculations show.

A more cautious approach to distributions under Santander executive chairman Ana Botin, falling profitability in Brazil and mixed fortunes in some of its top 10 markets have hampered the big bank's shares, analysts and investors added .

Ms Botin, whose father Emilio previously managed Santander, has held the position since his death in September 2014.

Santander, which unlike BBVA does not carry out extraordinary buybacks, paid 12.8 billion euros, or 18.4% of its market capitalization, according to Reuters calculations.

The focus on capital distribution has driven up shares of other European banks such as Italy's UniCredit, while stocks with less generous distribution policies, including Santander and BNP Paribas, have been left to languish. dragged.

Santander Chief Financial Officer Jose Garcia Cantera told Reuters that investors' preference for payments made today during a period of high interest rates rather than heavily discounted future earnings will not last as prices fall. rate.

“We are starting to see the first signs of it,” Mr. Cantera said.

BBVA declined to comment.

On Monday, analysts at Barclays downgraded BBVA shares to “equal weight”, saying the “medium term potential of the stock has now been assessed”. They also upgraded Santander to “overweight”, citing falling interest rates which they said should support the bank, as well as cost cutting and its valuation discount.


Although BBVA can't compete with Santander in terms of scope and scale, its shares trade at more than 1.2 times book value thanks to a 32% jump so far in 2024.

Santander shares have risen more than 16% in the same period, but trade at just over 0.7 times book value, in the bottom third of major European banks, according to LSEG data.

“For Santander, you have so many moving parts… you need a lot of stars to align,” said Michael Christodoulou, a London-based Berenberg analyst who expects the company to is taking advantage of falling rates to ease concerns about asset quality, including in Brazil.

Mr. Christodoulou recommends keeping both banks.

Whether BBVA's shares maintain momentum will depend as much on capital returns as on the bank's ability to meet its financial targets in its core Mexican and Spanish markets, given its greater exposure to fewer countries than Santander.

BBVA makes more than two-thirds of its profits in emerging markets and reinvests in fewer companies than Santander.

BBVA forecasts return on tangible equity (ROTE), a measure of profitability, of 17% to 20% in 2024, up from 17% in 2023, while Santander targets a ROTE of 16% in 2024, up from 15.06%. Last year.

Analysts at broker Alantra expect Santander to benefit in the medium to long term from cost savings from the rollout of global units and faster profit growth.

Improving performance of Santander's auto lending business in Europe and the United States should also help, they predict.

However, Santander must improve its profitability in Brazil, according to other analysts, who add that its expansion plans in the United States must bear fruit after a 48% fall in net profit in 2023 in that country.

To keep BBVA at bay, Santander would have to become more aggressive on takeovers, said Caixabank analyst Carlos Peixoto, adding: “but at this stage they are not able to deal with the crisis: “but at this stage, she is not in a position to do so.”

Santander's fully loaded core Tier 1 capital ratio, the strictest measure of solvency, stood at 12.26% at the end of last year, compared with 12.67% for BBVA.

On March 22, Santander said it planned to pay out more than 6 billion euros in dividends and ordinary share buybacks compared to 2024 results, as part of its policy of paying out half of its profits to shareholders.

Santander's strategy of investing in a more diverse range of businesses will be rewarded over time, Mr Cantera said.

“When things recover and the market starts to value growth more, banks that have not invested for the future will be at a disadvantage,” he added. (1 dollar = 0.9245 euros)

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