EUR 100.00 For Business Accounts Only

IBERIAN DAILY 06 SEPTEMBER (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: BANKING SECTOR, BBVA, DURO FELGUERA, ELECTRICITY AND GAS SECTOR, INDRA, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

Optimism on trade negotiations
The resumption of talks at the beginning of October between China and the US, along with the solid non-manufacturing ISM data in the US led to gains on global stock markets. In the Euro Stoxx, with almost all the sectors posting gains, we highlight hose of Banks and Autos vs. the drops in Utilities and Real Estate. On the macro side, in Germany July’s factory orders fell more than expected. In Spain, the Treasury will cut the volume of net debt issues expected in 2019 by additional € 10 Bn to € 20 Bn, 43% below the estimates at the beginning of the year and the lowest level since 2007. In the US, August’s non-manufacturing ISM rose more than expected, suggesting a 2Q’19 GDP of 2.0% QoQ, in line with the consensus. The ADP private employment survey for August recorded 195,000 new jobs, far above the forecast and previous data. Non-farm productivity retained the level from 1Q’19 (unexpectedly), and 2Q’19 unit labour costs grew slightly more than expected. Lastly, July’s final core capital goods orders were slowed down less than the initial figure released In China, government sources confirm a cut in banking reserves ratios shortly.
What we expect for today
European stock markets would open flat with some profit taking although the optimism about a possible trade agreement will continue to prevail over the coming days. Currently, S&P futures are up +0.34% (the S&P 500 closed practically flat vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 16.27%). The Asian markets that are open are climbing (Hong Kong +0.45% and Japan +0.53%).
Today in Germany we will learn July’s industrial output, in the euro zone the final 2Q’19 GDP, in Mexico June’s fixed investment and in the US non-farm job creation, salary gains and August’s unemployment rate. In credit ratings, Moody’s will review Italy’s rating (Baa3, stable).


COMPANY NEWS

BANKING SECTOR. Cuts in BKIA and CABK and analysis of impact from IRPH.
We cut our estimates and T.P. for the two hardest hit banks by IRPH (CABK and BKIA), updating our 12M Euribor hypotheses (to -35bps/-40bps for Dec’19 and ’20, around -20bps vs. our previous estimate), and obtaining new references of € 3.26/sh. (-8% vs. previous T.P.) and € 2.07/sh. (-21% vs. previous T.P.). We stress that on the 10th of September we will learn the opinion of the advocate general of the European Court of Justice (ECJ) on the IRPH clauses, which will be key as it is usually the same as the court’s ruling. The case is complex (IRPH index cannot be annulled, but the clause containing it can). Our opinion is that only 50% of the lawsuits will move forward, although we measure the worst possible scenario (100% of the suits + full retroactivity + IRPH replaced with Euribor). The impact would be significant in CABK (around -5% on sustainable Net Profit and -80bps on CET1 BS(e) and additional -10% in T.P.) and BKIA (-4% and -35bps BS(e) and additional -9% in T.P.), which could lead to DPS cuts’19 (CABK) on the increase in provisions. For the rest of the banks the impact would be below -1% on Net Profit and -10bps on CET1. We think the IRPH would therefore be factored in to CABK’s share price and the stock should close the gap in its share price (after 10/09), and we maintain our BUY recommendation.

TELEFÓNICA, BUY
According to the press, El Confidencial, TEF could consider a share buyback of up to 2% (around € 667 M based on the current market cap, accounting for some 1.7% of NFD) and its later cancellation, along with its current 1.48% treasury stock.
On another note, according to El Econonimsta, the Company would be also analysing the sale of its división in Ecuador for some € 600(800 M. TEF Ecuador accounts for 1% of the company’s EBITDA and EV.
MARKET IMPACT
We do not expect a relevant impact from this news. As for the possible share buyback, although it conveys a message that the share is inexpensive, we believe that the amount is not relevant, in total accounting for 3.5% of total shares (and +1.7% in NFD). Asset sales continue to be a formula for its strategy to optimise its portfolio and reduce debt, which we welcome, although Ecuador’s subsidiary has an irrelevant size and its sale would enable to reduce NFD by around 1.8%.