BBVA is the 2nd largest Spanish Bank (by capitalization) with business concentrated in Mexico, Spain and Turkey and with its profit growing fast (+ 50% in Q1 2023) thanks to strong operations in Mexico and interests’ rates increase in Europe.

BBVA is a competitive and succesful player thanks to its technology and customer service that allows them to keep growing organically. If BBVA continues its buyback program, I won’t be surprised to see its dividend growing 10-15% every year till 2030. My target price by 2030 is 26€ while I expect BBVA to reach 15€ by 2026.

Tangible Book Value increase

Why should you be interested in this company?

 

BBVA and all the European Banking system have been struggling for the past 15 years (since Lehman Brother bankruptcy). Many banks have failed to survive and many more had to reduce costs and add capital to cover large losses on Non-Performing Loans. Today European banks are larger, leaner and with large reserves to sustain long periods of recessions.

Below, the main advantages that I see in BBVA today:

  • Cost advantage:
    • Since 2022, BBVA is  working below 50% cost/revenue and it might reach 35% by 2025; giving them not only profitability but also resources to sustain credit losses during future recessions.
  • Leader in young and growing markets
    • Mexico and Turkey represent two strong opportunities for BBVA:
      • Mexico economy still has space to increase their Banking adoption (according to World Bank data 47% of adults had a bank account in 2018), very far from the normal usage in developed countries like USA or Europe (95% of their adults). Moreover, Mexico is facing a population and GDP growth that will translate into higher business. BBVA today is #1 and controls 42% of the country’s salaries.
      • Turkey has a very young population (and growing) that is very used to BBVA e-commerce banking applications, making its business very scalable. Today it is keeping the 2nd position and 1st within the young audience.
  • Higher Interest Rates in Europe:
    • Europe moved since 2022 from –0.5% to 3.75% Interest rates (Euribor reached 3.8% on May 8th), driving much higher Net Interest income (43% Year on Year increase) and projected to continue growing.
  • Technology has created efficient and effective operations:
    • In the past years, BBVA has been investing a lot in technology, creating a very strong and user-friendly application. Today more than 70% of the operations are digital without manual intervention making business scalable for the future.
    • Today BBVA generates a 16.3% ROTE.
  • Current evaluation
    • BBVA, as the whole European Banking Industry, is very undervalued with a PE close to 5 and an expected dividend higher than 8%.
    • Moreover, the last 2 buyback programs helped to increase Book Value per share (where BBVA capitalization represents only 70% of Tangible Book Value).
  • Comfortable Reserves and Deposits
    • In Q1 2023, BBVA has published 13.3% CET1, giving them 4B€ extra reserves vs. their target of 12% CET1. Moreover, this number is 4% above the ECB requirement.
    • Deposits have been consistent even during the Q1 turmoil in USA, giving ample liquidity to the company to continue providing credit to the economy.

 

Digitalization progress

“The Fab 4”

  1. Free Cash Flow yield higher than 10%
    1. In general, Banking Industry uses Net Profit (instead of Free Cash Flow). Today BBVA profitability is higher than 20% and keeps growing.
  2. Debt or Financial solidity
    1. As mentioned, BBVA has reserves and liquidity to support difficult economical environments.
  3. Strong and trusted management
    1. Onur Genc, current CEO, has proved to be very effective in transforming in the company leveraging intense use of technology. All 4 regions have improved in the last 3 year, even considering high inflation economies like Turkey and Argentina. Moreover, he is also aligned with shareholder interests, increasing dividends and using buyback to generate additional value for its investors.
    2. Management is considering distributing 4B€ on top (+10% of current capitalization) from part of current reserves in the next 2 years.
  4. Margin of safety
    1.  On May 8th, BBVA has an average Target Price of 8.22€ (vs. 6.38€ stock price), representing a 28% opportunity in the short term. Citigroup is even suggesting a 10€ price within a year (+56%).

 

Risks

As in every investment, there are some risks associated. Here the main ones:

  • A possible recession could affect the credit payments, reducing profitability, reserves and future dividends.
  • Technology Giants could enter in the industry leveraging their customer base (starting with Apple, Amazon, Meta and Google).
  • Current Deposit turmoil could increase the Deposit Beta (basically the cost on deposits) and reduce general profitability.

 

Conclusion

BBVA is an efficient European bank, combining improved profitability in Spain and organic growth in Mexico and Turkey (where Net Profit could triple by 2030).

If BBVA keeps reducing the number of shares, BBVA could be in the position of distributing 2€ dividend per share (33% on current prices) and probably 26-30€ share price.

Current shareholders could benefit from high yield dividends and business growth in the next 10 years.