EUR 100.00 For Business Accounts Only

IBERIAN DAILY 26 JUNE (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: ARCELOR MITTAL, BANKING SECTOR, CAF, IAG, OHL, SPANISH MARKET UPDATE, TALGO, TELECOMS SECTOR.

MARKETS YESTERDAY AND TODAY

Finally a rally
Most of the European stock markets posted gains of less than 1% after the drops from the previous session. In the Euro STOXX, only Basic Materials, Travel&Leisure and Real Estate recorded losses, with Financial Services and Banks leading the gains. On the macro side, in the euro zone, the ECB’s meeting minutes showed that the organisation agreed by majority, and not unanimously, to expand its anti-coronavirus programme by € 600 Bn, admitting the uncertainty on economic outlook, risks of falling inflation and even deflation. In Spain, the Govt. and social partners agreed to extend furloughs until September. In the US, the third reading of the 1Q’20 GDP showed a -5.0% contraction QoQ (in line with expectations and the previous data) and private consumption -6.8%. May’s durable goods orders rose more than expected to 15.8% from April’s -17.7%, whereas weekly jobless claims grew more than expected. Texas, the state with the most aggressive withdrawal from lockdown and with the highest growth of Covid-19 cases at present, has suspended its withdrawal from lockdown. From the Fed, R.S. Kaplan stated that the US economy hit a floor in May, that recovery will depend on new coronavirus cases and that he sees no reason to set negative interest rates. In Mexico, April’s retail sales fell to a series low, while the Central Bank cut the reference rate by -50bps, as expected.
What we expect for today
European markets would open with gains of more than 1%. Currently, S&P futures are up +0.22% (the S&P 500 closed up +1.10% vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 32.22%). Asian markets are trading with mixed results (Japan +1.36% and Hong Kong -0.57%).
Today we will learn in the Euro zone May’s M3, in France the consumer confidence index, in Spain the retail sales data, in the US May’s personal income and outlays, and in Mexico April’s IGAE Economic Activity index.


COMPANY NEWS

ANNUAL SPANISH MARKET UPDATE
Today we are releasing our report on the Spanish market, in which we review our estimates and T.P. for all the stocks in our coverage universe and we highlight the top picks of our portfolios (model, 5-stock, high yield and Mid&Small cap). We change Bankia to BUY, and NH, Euskaltel and Iberpapel to SELL. We cut our T.P. for our companies in our coverage universe by -18% on average, with the most relevant changes being the following: Prisa (-59%), IAG (-56%), Bankinter (-55%), Liberbank (-53%), Unicaja (-49%), NH (-43%), Aedas (-42%), Bankia (-41%), Metrovacesa (-39%), Lar (-38%), Arcelor (-38%) and BBVA (-37%). Of all the stocks in our coverage universe (59 vs. 65 in our previous report), 72% have a BUY recommendation (vs. 55% previously) and 28% have a SELL recommendation (vs. 45% previously). Our Top Down valuation for the Ibex 35 for Dec’20 stands at 7,780 points (vs. 9,885 pre Covid-19), with an implicit P/E ratio for Dec’20 of 16.3x vs. 18.9x at which the 12M forward is currently trading and 13.5x on average expected for 2010-30. From a Bottom Up perspective, we value the IBEX 35 at 8,501 points over a 12-month period (+12.4% upside vs. 10,782 previously).

BANKING SECTOR
The ECB is readying a document for public consultation on bank mergers that it expects to release before the summer to gather, as usual in these processes, the opinions of the banking sector. In the document it will analyse the criteria to be looked at in the merger projects, detailing the capital to be required in the integration and how badwill will be treated. This aspect is of vital importance, as currently the ECB generally does not allow badwill generated in the mergers to be used as capital, and thus most of the merger projects require a capital increase in order for the capital ratio of the merged bank not to be diluted below the regulatory limit. In this regard, the lower the market valuations are (i.e. higher badwill generated in the merger because the acquisition comes below book value), the higher the dilution on the capital ratio, with this being a major hurdle in the sector consolidation.
In its consultation, the ECB will specify how to assess the sustainability of the group’s business model, its governance system and the risk management. It will also detail the capital the new bank must maintain in comparison with the base ratios of the banks participating in the deal. Lastly, it appears that it will ask other authorities to make legislative changes outside its competences, such as liquidity management and elimination of restrictions on marketing bank products. All these changes are necessary to move forward in the bank consolidation and facilitate trans-border mergers.
Positive news but without impact for the time being. We will have to wait to see the consultation document and how it is developed and transformed into a binding guide. This process usually lasts a few quarters and thus, we do not think it will be ready until the end of the year. That said, having clear guidelines from the regulator will speed up the consolidation process in the banking sector, which we believe is necessary to improve the banks’ profit, especially after Covid-19. In any event, we believe that consolidation will not materialise before 2021-22, given that it is also necessary to know the level of NPLs that banks will account due to Covid-19, which is still uncertain. We also think that the process should start with domestic mergers and in Spain, in our view there might be clear candidates, with the merger of Liberbank-Unicaja or Bankia with another bank. We have a positive view on all three stocks, which could be strengthened if expectations on M&A moves return.