EUR 100.00 For Business Accounts Only

IBERIAN DAILY 17 JUNE (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: CELLNEX, FERROVIAL, GRUPO CATALANA OCCIDENTE, IAG, IBERDROLA, INSURANCE SECTOR, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

Europe reacts to stimulus plans and macroeconomic data with gains
European markets posted gains (more than +3% in some cases) after rumours that Trump would be studying an infrastructure plan worth US$ 1 Tn. In the Euro STOXX, all the sectors posted gains, led by cyclicals and financials such as Banks and Construction. By contrast, Travel & Leisure and Real Estate were the worst relative performers, ending almost flat. On the macro side, in Germany June’s ZEW index had mixed results, with greater recovery in the expectations component. In general, the data suggests GDP will contract slightly less in 2H’20 than the -14.1% YoY expected by the consensus. In the UK, April’s unemployment rate unexpectedly remained at 3.9%. In the US, core retail sales for May rose more than double what was expected in MoM terms, suggesting a slightly smaller drop in private consumption than expected by the consensus. By contrast, May’s industrial output rose less than expected, as suggested in the ratio of orders/inventories in the manufacturing ISM. Lastly, the NAHB real estate sector confidence index for June beat expectations, coming in far above 50. In the conference before the Senate, J. Powell warned about the macroeconomic fragility and the uncertainty on the recovery, insisting that a larger monetary and fiscal stimulus from the Fed will be needed. On another note, hospitalizations due to Covid-19 hit highs in Texas, Nevada and Florida. In Japan, May’s exports/imports slowed down more than expected. In China, Beijing increased the alarm for Covid-19 to 2 out of 4 and restricted domestic flights.
What we expect for today
European indices would open with some bearish bias where airlines could react negatively to the domestic flight restriction imposed in Beijing. Currently, S&P futures are unchanged (the S&P 500 closed flat vs. its price at the closing bell in Europe). Volatility in the US fell (VIX 33.67%). Asian markets are falling (Japan -0.37% and Hong Kong -0.08%).
Today in the euro zone and UK we will learn May’s inflation, in the US May’s real estate market data, housing starts and building permits and in Brazil the Selic interest rates meeting. Debt auctions: Portugal (€ 1.25 Bn in 3M and 11M t-bills) and Germany (€ 5 Bn in bonds due 2030).


COMPANY NEWS

GRUPO CATALANA OCCIDENTE, BUY
Yesterday the Spanish insurance companies, through their employee association Unespa, rejected the conditions of the Govt. aid for credit insurance, negotiated with the Consortium for Insurance Compensation (CCS). The sector believes the measures are not enough and far from those agreed upon by other European Governments. Note that several Nordic countries are creating a “sunk-costs” protection system through reinsurance (in general the companies cede 80% of premiums, but also 90% of associated claims). However, the current framework agreement offered by CCS could be similar to the 2008-09 crisis. That is, a stop-loss reinsurance with recovery of claims covered by the CCS for a specified number of years, on insurance companies’ future profits (i.e. for all intents and purposes functioning as a loan). Thus, the companies operating in Spain believe that the agreement is not enough, as it does not protect them from the rise in claims, as occurs in the plans put forth by the rest of the governments. The consequences would be completely negative for the Spanish economy, given that the insurance companies will not be able to maintain their normal coverage levels, and they will begin to substantially reduce TPE (risk accumulation).
Negative news of limited impact. The increase in claims associated with Covid-19 would be fully backed by Spanish companies if no agreement with the government is reached although the impact is limited slightly below 10% of GCO’s normalised Net Profit without Covid-19. In our coverage universe, Grupo Catalana Occidente would be the hardest hit, the lending business of which accounts for 50% of its total premiums and until Covid-19 around 50% of its recurrent result. In Spain, it operates with Crédito y Caución and the amount of premiums to be potentially covered by CCS would be € 300 M BS(e). If no agreement is signed, the investment case remains unchanged. Note that GCO has its own internal reinsurance (i.e. Munich Re) to which it grants 38% of premiums (and the associated claims), retained premiums would reach around € 180 M. Assuming a similar claims ratio to the previous crisis, this would leave CR at 130% and additional losses (net of taxes) of € -36 M on group Net Profit’20 (€~148 M BS(e)), an adjustment that we already considered in our valuation out of caution (i.e. we are not considering any measure from the company to reduce risk exposure, something it will no doubt do). Furthermore, not signing with CCS nor with the rest of the government with which there is still no agreement would not represent a Solvency event, as in a negative scenario it would leave S-II above 170%.