Stronger capital, efficiency help BBVA outshine Spanish rivals

Banco Bilbao Vizcaya Argentaria SA's share price has outperformed those of its fellow Spanish banks since the onset of the coronavirus pandemic, supported by a stronger capital position and advanced digital capabilities.

Between Feb. 5, 2020, and Oct. 15, 2021, the bank's share price rose 17%, compared to declines of 5% at CaixaBank SA, 19% at Banco de Sabadell SA and 8% at Banco Santander SA.

Capital gain

BBVA's performance was spurred by the November 2020 agreement to sell most of its U.S. business to The PNC Financial Services Group Inc. for $11.60 billion. It said it expected to make a capital gain, net of taxes, of about €580 million, adding about 300 basis points to its fully loaded common equity Tier 1 ratio. At the end of the second quarter, during which the deal completed, BBVA's CET1 ratio stood at 14.17%, up from 11.87% three months earlier.

This capital boost affords the bank financial flexibility in the event that it is faced with a more challenging environment, and will allow it to make efficiency improvements in its business, S&P Global Ratings wrote in a September report. It estimated the bank's return on average common equity will improve to between 8.5% and 9% in 2022 and between 9.0% and 9.5% in 2023, compared to just 2.80% in 2020 and 7.33% in 2019.

This capital improvement is "a break from the past; its ... capital position before the U.S. sale was regarded as an area of weakness by many investors," Michael Christodoulou, analyst at Berenberg, wrote in an Aug. 13 note.

BBVA declared an interim 2021 cash dividend of 8 cents per share and announced a share repurchase program equivalent to as much as 10% of its outstanding capital that could begin in the fourth quarter.

Focus on costs

In keeping with a wider trend in Spain, BBVA is undergoing a restructuring, cutting 2,935 jobs and shuttering 480 branches. It booked a €696 million charge in the second quarter, but the program is expected to generate savings of roughly €250 million annually before taxes starting in 2022.

Its cost-to-income ratio was 45.14% at the end of the second quarter, the lowest among the biggest four banks in the country.

BBVA is "probably the Spanish bank most advanced in the digitalization race," which will help it downsize its branch network, improve efficiency and pave the way for digital channels to be the main selling tools, according to S&P Global Ratings.

The bank also has significant operations outside its domestic market of Spain, including Mexico and Turkey. At a time of persistently low interest rates, this geographic diversification has helped alleviate the pressure on net interest income. In the first half of 2021, more than 70% of its net interest income was derived from markets outside Spain.

The bank's strong retail presence in these markets provides business stability, growth opportunities, economies of scale and pricing power, according to Ratings.