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IBERIAN DAILY 12 MAY + 1Q’21 RESULTS. HIGHLIGHTS AND REST OF PREVIEWS (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ACS, BANKING SECTOR, ELECTRICITY SECTOR, IAG, IBERDROLA.

At the end of today’s report, and during the entire results season, we will include a presentation with positive and negative results highlights and previews for the 1Q’21 results to be released over the coming days in Spain.

MARKETS YESTERDAY AND TODAY

Profit taking on Stock Markets
European stock markets ended with losses of around -2.0%, dragged down by concerns about inflation (April’s inflation will be released today in the US), where the widening in sovereign yields hit once more the US technology sector. The IBEX was the best performer among European indices again, sliding -1.7%. Thus, in the Euro STOXX, all sectors ended in negative territory, with Travel & Leisure and Industrials seeing the biggest drops vs. Banks and Household that were the best relative performers. On the macro side, in Germany, May’s ZEW climbed above expectations up to the highest level of the historical series, underpinning rises in the IFO index. In Spain, the European Commission raised the GDP’21-22 to 5.9% and 6.8% vs. 5.6% and 5.3% previously, and brought forward the return to pre-pandemic GDP levels to 2022 (although with higher unemployment). From the Fed, Harker, Daly, Bullard and Kashkari warned that it is still too early to talk of tapering, and they believe the rise in inflation is transitory (in the medium term they would accept an inflation figure of between 2.5% and 3.0% vs. the 2.0% target). In US business results, Hanesbrands and TransDigm beat expectations.
What we expect for today
The European stock markets would open with losses of around -0.5%, amid concerns over a premature withdrawal of stimulus by the central banks. US tech companies are once again the worst performers. Currently, S&P futures are down -0.4% (the S&P 500 ended practically unchanged vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 21.84). Asian markets are falling (China’s CSI -0.3% and Japan’s Nikkei -1.6%).
Today in the euro zone we will learn March’s industrial output, in the UK the 1Q’20 GDP and in the US April’s inflation. In debt auctions: Portugal (€ 1.25 Bn in bonds due 2031 and 2035) and Italy (€ 6.5 Bn in 6M t-bills).

COMPANY NEWS

BANKING SECTOR
Yesterday the Cabinet approved the framework to restructure ICO debt within the Code of Good Practice. Within this framework three options are given:
(i) Extend the loan maturity to 10 years (vs. 8 currently): the business must have seen its billing fall at least -30% in 2020 vs. 2019, not be an NPL or be in bankruptcy proceedings, and this option can be requested until 1 November’21. If the drop in billing is smaller, approval will be at the discretion of the bank. Collateral (and therefore the loans) will see their cost rise between +20bps and +285bps depending on the maturity.
(ii) Conversion into a participation loan: apart from the previous conditions, the company must have incurred losses in 2020.
(iii) Request a haircut (available until 1 December’22): Here the Govt. will provide up to € 3 Bn to face its part of the haircuts. These haircuts will be up to 50% for companies that have lost between 30% and 70% of billing and up to 75% for those having lost more than 70%. Likewise, the company would have to have incurred losses in 2020. The banks have the last word, and they will decide on the application of a haircut. The haircut is split between the bank and the Govt. in the same proportion as the collateral (~70-75% for the Govt.). Assuming the € 3 Bn is consumed, the losses for the sector would be €~1.3 Bn, an insignificant amount.
The banks have one month starting now to adhere to this Code of Good Practice, which they are expected to do, and furthermore they will have to pledge to keep working capital at least until 31 December’22.
Negative news with no relevant impact on the sector. We believe the banks will choose to refinance in almost all the cases, and thus the amount of haircuts should be very small. Thus, as we mentioned above, the risk is very small and would leave insignificant amounts for the banks: in the case of Bankinter, with a ~10% share of ICO loans, it would mean some € 130 M; in the case of SAN, with a ~25% share, it would mean € 385 M; in the case of CABK+BKIA, with a joint share of ~22%, it would mean € 283 M; and for BBVA, with a 9% share, the amount would be € 115 M (with the remainder being distributed among small domestic and foreign banks).
The most negative reading for the time being is merely a qualitative aspect, which in our opinion comes from the inclusion in the refinancing of all debt issued since March’20 (not only the state-backed loans) and also the need to maintain working capital lines through December’22, which means a greater risk in debtors with a weak credit profile.