CaixaBank : Credit Update; Buy AT1 and Senior Preferred

CaixaBank is holding today its Ordinary General Meeting in Valencia where it transferred its registered office in October following the referendum in Catalonia and subsequent political and social unrest. Political turmoil seems abated for now; the Spanish economy has not been affected, performed well in 2017 (GDP grew 3.1%) and is expected to continue doing so in the coming years (2.8% and 2.4% GDP growth expected by ODDO BHF in 2018 and 2019 respectively). Given its strong exposures to the Spanish economy and leading market shares in the country, CaixaBank is well placed to benefit from the supportive economic conditions, and we are revising our Credit Opinion on the bank to Positive from Stable. Recurring profitability should improve and non-performing assets continue to decrease. In our view, a differentiating factor for CaixaBank compared to domestically-focused Spanish peers is its very strong domestic franchise across a number of financial services (banking, asset management, insurance). Given its Catalan roots, and strong market shares in the region, CaixaBank is somewhat more exposed than peers to the resurgence of political upheaval, although it appears contained and would affect the entire sector if renewed. The 85%-owned Portuguese Banco BPI provides some, but limited, geographical diversification; the integration of Banco BPI has progressed well, it has good credit metrics and the Portuguese economy also shows good prospects. - We have revised our recommendation to ‘Buy’ from ‘Stable’ on CaixaBank’s senior preferred (SP) debt, as we expected spread tightening notably from CaixaBank’s intention to meet MREL requirement through full subordination, providing protection to SP holders. The yields of the bank’s senior non-preferred and Tier 2 debt appears fair, incorporating the improving trend in credit metrics and expected rating upgrades, and our recommendation is ‘Neutral’. Finally, we have a ‘Buy’ recommendation on CaixaBank’s AT1 securities reflecting the bank’s solid and improving fundamentals, comfortable distances to triggers as well as relative and fundamental attractive yields (PERPNC24 4.2% and PERPNC26 5.2%). - >Support Factors - - Very strong domestic franchise in various financial services business (banking, insurance, asset management), providing the group with resilient income from significant distribution capacity, cross-selling potential and critical size/economies of scale.- Well articulated and executed strategy. Risk appetite appears moderate; opportunistic external growth has been well conducted, synergies delivered on time, or before schedule.- Prospects for the Spanish economy are sound.Points to Watch - - Smaller geographical diversification enjoyed by large European peers and particularly domestic ones (Banco Santander and BBVA) leaving the bank’s performance dependent on that of a single economy. However, CaixaBank went through the severe banking and economic crisis in the country fairly unscathed.- Resurgence of political turmoil and social unrest in Catalonia, although not expected, would negatively cause spread widening on CaixaBank’s debt securities.