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BBVA's US sale to give it capital firepower for M&A, buybacks

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BBVA's US sale to give it capital firepower for M&A, buybacks

Banco Bilbao Vizcaya Argentaria SA's sale of its U.S. business will provide the lender with a huge capital injection that opens up the possibility of share buybacks or acquisitions on the Spanish market, while also providing it with the financial strength to offset the economic impact of the coronavirus.

The lender, Spain's second-largest by assets, announced Nov. 16 that it would sell BBVA USA Bancshares Inc. and BBVA USA for $11.60 billion to U.S.-based PNC Financial Services Group Inc. in a deal expected to close in mid-2021.

BBVA's shares soared on news of the deal and were up 19.50% in mid-afternoon trading in Madrid.

BBVA's U.S. operations have long been regarded as the poor cousin of the group, and analysts said the sale would free the bank of one of its weaker-performing businesses, while freeing up additional capital for buybacks or acquisitions. BBVA, although headquartered in Spain, owns the largest bank in Mexico, Grupo Financiero BBVA Bancomer SA de CV, and also has significant operations in Turkey. The bank has been shedding businesses where it does not have a leading position. For example, it sold its Chilean bank in 2018.

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"The U.S. business has been suboptimal in terms of profitability versus many parts of the group ... and the strategic rationale of maintaining that U.S. retail franchise has been questioned," Jefferies analyst Benjie Creelan-Sandford said in an interview.

In the third quarter, net profit at the bank's U.S. operations fell 49.2% on the year to €90 million, while overall the group's third-quarter net profit dropped 4.1% to €1.14 billion. The U.S. business accounts for 13% of gross income and 13% of gross assets.

BBVA could have achieved a higher price for the U.S. business in previous years, but given current market conditions, the valuation is reasonable, Creelan-Sandford said. Prior to the coronavirus pandemic, bank profits have been hit across the board by low interest rates and tough competition along with stricter regulation in Europe.

Through the deal, the bank is realizing 50% of its market capitalization in cash, which "substantially reinforces the current capital position and gives them flexibility going forward in terms of accelerating shareholder returns or looking at M&A," he said.

Capital boost

The deal will increase BBVA's common equity Tier 1 ratio — a key measure of financial and capital strength — by nearly 300 basis points to 14.46%, from 11.52% at the end of September. The pro forma figure is almost 600 basis points above the bank's regulatory minimum. The bank is one of the lowest-capitalized European lenders.

"The other benefit of doing this deal is taking those capital question marks away," Creelan-Sandford said.

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Carlos Torres, BBVA executive chairman, told analysts in a presentation Nov. 16 that the deal "significantly reinforces our financial position, generating significant excess capital, and this not only gives us the strength that is so good in these uncertain times, but above all it provides lots of strategic flexibility."

The excess capital will be used for share buybacks once ECB restrictions are lifted on dividends and buybacks, but BBVA will also use the capital to expand its position in its main markets, he said.

M&A focus

The banks believes "there might be opportunity to reinforce the franchises where we have leadership positions" as the economy recovers from the coronavirus, he said.

"It makes sense ... to divest in the U.S. because others can do better and we also believe we can grow in the places we can do better," Torres said, declining to go into details.

Johann Scholtz, an analyst at research and investment management firm Morningstar, said he would be "surprised" if the bank made additional acquisitions in Mexico because its leading position in the country would raise competition concerns, leaving acquisitions in Spain as the only viable option.

In Spain, CaixaBank SA announced plans in September to acquire peer Bankia SA, sparking talk of further M&A in the country. BBVA has since been linked to a deal with midsize lender Banco de Sabadell SA.

The low market valuations of European banks means the price of any deal would create badwill, which would be financially beneficial for the bank as in the case of Intesa Sanpaolo SpA's acquisition of Unione di Banche Italiane SpA.

However, banks need to take into account the total cost of integrating another lender, for example in terms of taking on bad loans or financing the whole integration, he said.

The less costly option for BBVA would be to return the bulk of the excess capital to shareholders, Scholtz said.

PNC said it does not expect regulatory or political difficulties in closing the acquisition. Bank executives highlighted the minimal branch overlap as a positive for regulatory approval, meaning there will be fewer branch closures.

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