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SANTANDER: CONFERENCE CALL ON ACQUISITION OF MINORITY STAKES IN MEXICO (ANÁLISIS BANCO SABADELL)

Highlights from the Conference call that has just ended on the acquisition of the minority stakes in Mexico although it was clearly focused on the performance of its businesses.
 Note that the details on the acquisition of the minority stakes in Mexico are as follows:

- SAN plans to acquire 100% of the minority stakes in the Mexico division (a unit contributing 15% of group Net Profit’20). The total is 8.3% for € 550 M (~1.2x P/BV BS(e)), and the impact is -8bps on CET (12.34% as of Dec’20). This means valuing the Mexican division at around € 6.63 Bn (fully in line with our valuation).
- The price means a 24.3% premium over SAN Mexico’s closing price yesterday and a ROIC of 14%, with the impact expected to be 0.8% on EPS’23 in 2023.
- The deal will be neutral on TNAV.
- It is expected to be finalised between 2Q’21 and 3Q’21 (with this last quarter being the most likely date).
- If the banks gets hold of a 95% stake (vs. 91.7% currently), SAN will request the delisting to the regulator.
 Rationale behind the deal. SAN remains focused on extending its business on those regions with double-digit returns, as is the case of Mexico, which has reported in the past 5 years (ex 2020 given the exceptional situation) >10% Net Profit growth and a sustained RoTE of around 19%. The bank has also explained that Mexico offers relevant growth capacity for the banking sector as the companies only show a financial leverage of 13%.
 Other relevant messages.
- SAN explained it has a positive bias on the 1Q’21 operating trends in almost all regions (that can be extrapolated to the YE), with Spain being the discordant note (10% of consolidated Net Profit’20). In general, GDP forecasts are being raised in many countries, which along with the progress made in vaccination, confirm its view. This also allows the bank to reiterate its better stance on credit quality. Thus, in 2021 it confirms that its CoR would be below the 128bps seen in 2020. The level outlined thus far was 120bps (fully in line with BS(e)) although we believe that these messages could be slightly lower, leading to a run-rate of quarterly of provisions of some € 2.6 Bn (-155 vs. 2020 run rate and vs. € 2.8 Bn BS(e)) in 2021). The provisions set aside in advance in 2020 in SCUSA, the UK and Brazil, along with the positive macroeconomic performance, would underpin its guidance, offsetting the significant uncertainties surrounding NPL in SMEs in Spain. The bank has outlined it foresees a favourable performance particularly starting in the 2H’21 (given the poor performance expected in tourism).
- The company is confident in reaching a RoTE’21 at the top end of its guidance (between 9% and 10%) and above its CoE (8-9% according to the bank) vs. an 8% RoTE BS(e) and slightly lower expected by the consensus). We believe this can be explained by the better commercial dynamism than initially expected, the cost-cutting carried out in Europe (enabling to keep flat expenses in 2021) and the improvement of CoR. If its RoTE guidance of around 10% is met, the operating Net Profit’21 would come in at € ~6.5 Bn, around +15% vs. the latest consensus data given by the company.
- The bank confirmed its pay-out range of between 40%-50% of Operating Net Profit (in line with BS(e) and consensus: DPS’21 BS(e) € 0.13/sh. vs. € 0.11/sh. consensus; 5% yield). It also confirmed it would be already deducting it from the 1Q’21 CET1.
- Expected capital adjustments in 2021 (vs. 12.34% fully Phase In at YE’20).
o On the negative side: around -40bps of regulatory adjustments would be pending (-15bps/-20bps given the new definition of expected loss, -10bps of lending conversion and rest of less relevant adjustments). This drew our attention, as in FY2020 Results the company suggested a -20bps range for FY2021 (vs. -40bps in 2020) in regulatory adjustments. The minority stakes announced today of -8bps should be also subtracted.
o On the positive side: the bank outlined it expects a flat performance in RWA at the end of the year or even a slight drop and vs. +3%/+4% in previous years. This would be justified by the unfavourable performance of business volumes in Spain (where it foresees drops) and by the Management Actions that have not been specified (we assume securitizations, as usual, and revision of models) although at least focused on keeping RWA flat in the regions showing lending growth (SCSA and Brazil, mainly). For this reason, organic capital generation is expected to exceed 10bps on a quarterly basis in structural terms.
o With this in mind, the 2021 reference would stand at the top end of its guidance (11-12%) in FL terms (11.7% BS(e)).
MARKET IMPACT
Even though the deal of Mexico was not expected, it has a limited impact on fundamentals and we welcome the message conveyed on the 2021 guidance and the positive bias on the commercial dynamism (US, Brazil, UK) that would offset the expected pressure in Spain. Additionally, the credit quality would improve and underpin a lower CoR. This would continue to lead to estimate upgrades. The share price is climbing +2.15%, ~+2% vs. sector. We reiterate BUY.