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CAIXABANK / BANKIA: MESSAGES FROM THE CONFERENCE CALL (ANÁLISIS BANCO SABADELL)

These are the main messages from the conference call:
 Capital: The banks have reiterated that they do not need a capital increase to be able to carry out the integration and that the resulting capital ratio at the time of the deal, including all adjustments and with no transitional arrangements from IFRS 9 (FL CET ratio 11.3%), is in line with their capital targets (11.0-11.5% and 250-300bps MDA). The adjustments from the initial integration (around € -3.4 Bn or -160bps on CET1) will not be fully provisioned at the time of the execution, as many of them depend on subsequent negotiations (unions, termination of IT agreements, etc.). In any event, the companies expect to account most of these adjustments in 2021e.
 Synergies target: Regarding the revenues synergies (€ 215 M in 2025e), the banks have been conservative, as they do not include synergies in the banking business (where they expect to offset the drop in revenues stemming from overlapping businesses) and also assume revenues will be lost from the overlap in the insurance and asset management business. As for cost synergies (€ 770 M, 42% of BKIA’s cost base), most are expected to be obtained in 2021e (with the associated restructuring costs), and the companies stress that in the many integrations they have carried out in the past, both have always obtained more cost synergies than those announced at the outset.
 Dividends: In 2020e CABK reiterates its maximum pay-out policy of 30%, which is subject, in any event, to the regulator’s recommendations, where rumours suggest that the ECB would be considering to allow dividend payments again. Bearing in mind that the deal will be closed in the 1Q’21 and that the DPS’20 payment will take place in the 2Q’20, BKIA’s current shareholders will also benefit from this payment. As for DPS’21 and the remuneration policy going forward, the group outlined it has yet to be set, as it will be a decision to be made by the new Board of Directors.
 Antitrust authorisation: The banks are reasonably confident in the antitrust analysis, as the combined market share (~25% in loans and deposits) is in line with other markets in which the main bank has a 25-30% market share.
 NPL and coverage hypotheses: The analysis conducted includes an increase in provisions of around € 700 M (€ 1 Bn before taxes), which improves the coverage ratio by 2pp (up to 64%). This analysis is based on its scenarios of Covid-19 impact (-14% drop in GDP’20 and +11% in 2021e), which are apparently conservative for the time being. Thus, this will mean a lower CoR in 2021-2022e (if its forecasts are met), although it is soon to confirm this factor. For the time being, the performance seen through September is positive, as 97% of the expired moratorium are fulfilling payment obligations.
 FROB’s stake: The FROB will have a seat at the Board of Directors (vs. Criteria’s 2 seats), but looking at the past experience with BKIA, we do not expect any political interference. Moreover, the Board of the new institution will be robust, as ~60% of its directors will be independent.
MARKET IMPACT
These messages are confident regarding the capital and balance positions that are needed to face the merger, although no visibility has been given on future plans (dividends, financial targets, etc.), which is understandable considering the current level of uncertainty and how fast the operation has been closed. We maintain our positive view on the operation and reiterate our BUY recommendation for CABK. We will revise our estimates and our valuation of the bank (current T.P. of € 2.26/sh.; +12% upside), with an expected impact of at least +10%. As for BKIA, the share price will adapt to the swap equation now, meaning that it will be subject to CABK’s performance.