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BBVA: MEETING WITH THE COMPANY (ANÁLISIS BANCO SABADELL)

Today BBVA held a meeting with analysts. Highlights from the CFO’s comments:
 Capital: The bank reiterates that it expects to end the year above 11% (vs. 10.84% in 1Q’20). In 2H’20 some of the negative effects seen in 1Q’20 will be partly reversed, especially the rise in RWAs from market risks. From a regulatory standpoint, and with the information available today on the economic situation and the pandemic, BBVA does not expect the regulator to impose any restrictions or capital buffers. There have been no new messages given on the dividend, and here we recall that BBVA postponed its decision until 4Q’20. As in the rest of the banks in our coverage universe, we assume there will be no dividend payment in 2020 due to regulatory restrictions.
 Performance in May/June: Business activity is recovering better than initially expected in Turkey, but also in Spain and the US. By contrast, Mexico and LatAm are lagging slightly behind expectations. In Mexico, the economic recovery has been worse than expected at the end of 1Q’20, but it is still too soon to know if there will be an uptick in defaults. Although it is true that the Govt. has not taken any measures to aid businesses like in Europe and the US, there are several factors that would lead is to think that the pandemic’s impact on the economy will softened.
 CoR guidance: BBVA maintains its guidance of 150-180bps, and for the time being the bank still expects it to fall within the low end of the range (and vs. ~180bps BS(e) and consensus). Here there are countries in which CoR may be higher than forecast in 1Q’20 (Mexico, Peru), but they will be offset by Spain, Turkey and the US, where it could be lower. If the CoR’20 guidance is confirmed in the low end of the range, there could be an upward revision of recurring Net Profit’20 of around € +850 M or +45% (vs. the current € 1.86 Bn BS(e) and € 2.15 Bn consensus).
 Costs: the banks maintains its guidance of a -5% cut in Spain in 2020 vs. 2019 (BS(e) in line) and a drop in real terms in emerging markets (i.e. excluding inflation). In the medium-term, the company sees high potential in organic savings since working from home will enable a reduction of physical spaces in both branches and head offices.
 M&A: for the time being, it remains focused on organic growth and it is not interest in buying or selling beyond the announcements made (sale of Paraguay’s business, which will be predictably closed in the 2Q’20 and JV in insurance Spain with Allianz, which we expect to be completed in the 4Q’20-1Q’21). Specifically, the bank confirmed that both its subsidiaries in Turkey and the US are regarded as core also bearing in mind the good performance seen in this recovery.
Positive message on the recovery seen in the 2Q, especially in Turkey and the US, which are apparently faring better than we expected. Mexico is the negative news, the group’s main market (around 40% of Net Propfit), where we have a cautious stance on the impact from the pandemic, which has been apparently confirmed with BBVA’s message. The news in CoR was also positive although we believe it is too soon to take for granted the absence of a new outbreak/slowdown in the recovery. In this regard, we do not forecast higher estimates in BBVA in the short-term, and if this materializes within the range outlined it would have an impact of around +1% on valuation given the higher Net Profit retained in 2020 (some € 850 M assuming no dividend payment in 2020).