By Jesús Aguado
MADRID, March 25 (Reuters) – BBVA’s share price has more than tripled since late 2020, narrowing its valuation gap to Santander and highlighting a divergence in fortunes between the Spanish banks that may be short-lived.
Both trace their roots to 1857 and neighboring northern Spanish cities, but Santander SAN. MC emerged as the dominant bank in Spain with more than twice the assets of BBVA and, until very recently, a much larger market capitalization.
But the gap has narrowed from 20 billion euros ($22 billion) three years ago to about 5.5 billion euros, raising questions about who was right about their strategy.
The change reflects how investors are rewarding banks that share more of their revival profits than those that prioritize investment in future growth, as well as those that made the right bets outside of slower-growing Europe.
Shares in BBVA BBVA.MCwhich is worth about 64 billion euros compared to Santander’s market value of 69.5 billion euros, were supported by its Mexican subsidiary, which has about a quarter of the retail market.
“BBVA has in Mexico one of the best commercial banking franchises in any emerging market and it is doing even better for BBVA than Brazil for Santander,” said Enrique Quemada, president of investment bank ONEtoONE Corporate Finance Group.
Investors also rewarded BBVA for deciding to leave the United States in November 2020 to focus on giving more cash to shareholders, analysts and investors told Reuters.
“For growth, profit…increasing dividends and share buybacks, the market continues to reward us,” BBVA chairman Carlos Torres told shareholders this month.
Torres has been president since the end of 2018, when Onur Genç became CEO of BBVA.
Since 2021, BBVA has distributed 13.19 billion euros to shareholders, including extraordinary buybacks of 4.16 billion euros. This equates to 20.6% of its current market valuation, Reuters calculations show.
A more cautious approach to giving under Santander Chief Executive Ana Botin, falling profits in Brazil and mixed fortunes in some of its top 10 markets have weighed on the bigger bank’s shares, analysts and investors added.
Botin, whose father Emilio previously ran Santander, has been in the role since his death in September 2014.
Santander, which unlike BBVA does not do extraordinary buybacks, paid 12.8 billion euros, 18.4% of its market capitalization, Reuters calculations show.
A focus on capital distribution has lifted shares of other European banks such as UniCredit of ItalyCRDI.MIwhile stocks with less generous payment policies including Santander and BNP Paribas BNPP.PA were left behind.
Santander Chief Financial Officer Jose Garcia Cantera told Reuters that investor preference for payments today during a period of high interest rates rather than heavily discounted future profits will not continue when rates fall.
“Future growth will be more valued … We’re starting to see the first signs of that,” Cantera said.
BBVA declined to comment.
MORE DIVERSIFIED
While BBVA can’t compete with Santander in terms of reach and scale, its shares trade at more than 1.2 times book value thanks to 32.5% year-to-date 2024 upside.
Santander shares are up 15.5% over the same period, but trade at just over 0.7 times book value, in the bottom third of big European banks, LSEG data shows.
“For Santander you have so many moving parts … you need a lot of stars to align,” said London-based Berenberg analyst Michael Christodoulou, who expects it to benefit as the drop in rates eases concerns about quality. of assets, including in Brazil.
Christodoulou has a “hold” recommendation on both banks.
Whether BBVA shares maintain their momentum will depend as much on capital returns as on whether it can meet its financial goals in its core Mexican and Spanish markets, given its greater exposure to fewer countries than Santander.
BBVA makes more than two-thirds of its profit in emerging markets and reinvests in fewer businesses than Santander.
BBVA expects return on tangible equity (ROTE), a measure of profitability, of between 17% to 20% in 2024 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 savings with the development of global units and deliver faster profit growth.
Improving performance at Santander’s car lending business in Europe and the US should also help, they predict.
However, Santander needs to improve profitability in Brazil, other analysts say, adding that it is American expansion plans must pay after a 48% drop in 2023 net profit there.
To keep BBVA at bay, Santander would have to become more aggressive on buybacks, Caixabank analyst Carlos Peixoto said, adding: “but at this stage they are not able to do that.”
Santander’s core Tier 1 fully loaded capital ratio, the strictest measure of solvency, stood at 12.26% at the end of last year, compared with BBVA’s 12.67%.
On March 22, Santander said it expected to pay more than 6 billion euros dividends and common stock repurchases against 2024 results under its policy to distribute half of its earnings to shareholders.
Cantera said Santander’s strategy of investing in a more diversified range of businesses will pay off over time.
“When things turn around and the market values growth more, those banks that haven’t invested for the future will be at a disadvantage,” he added.
($1 = 0.9245 euros)
BBVA soars as Santander lags
(Reporting by Jesús Aguado; Additional reporting by Lucy Raitano; Editing by Tommy Reggiori Wilkes and Alexander Smith)
((jesus.aguado@thomsonreuters.com; +34 91 835 68 32; Reuters Messaging: Reuters Messaging: jesus.aguado.reuters.com@reuters.net))
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