EUR 200.00 For Business Accounts Only

UNICAJA: MEETING WITH THE COMPANY (ANÁLISIS BANCO SABADELL)

Highlights from the virtual road show we held with the company today:
 M&A: UNI does not think the Caixabank-Bankia merger will be a threat from a competitive standpoint, bearing in mind its profile as a niche bank (number one bank in its home regions) and the easing of pricing competition in a concentrated market. That said, the bank is obliged to look at all possible deals, large or small, that could generate value for shareholders, and any M&A move must have industrial logic and be accretive enough to offset execution risks. In this regard, the accretive impact on EPS is one of the most important parameters being monitored.
 Outlook for 2H’20 Operating Income: 2Q’20 was a floor quarter in terms of “core” revenues, and the bank expects recovery in 2H’20. In NII (-5% in 1H’20; -2.4% BS(e) in 2020e), apart from the commercial performance, underpinning the margin will be: (i) ECB financing at an advantageous rate, having refinanced in the TLTRO II auction the € 3.3 Bn from TLTRO II and increased the balance by another € 1.7 Bn, which we recall has a yield of -1%; (ii) the maturity of higher-rate deposits (4.2%) stemming from CEISS (with € 500 M maturing in 3Q’20, € 250 M in 4Q’20 and € 400 M in 2021). Furthermore, citizens’ accumulation of liquidity in light of the higher economic risk perception is slowing the pace of mortgage amortisations, which is positive for volumes and margins. In fee revenues (+0% in 1H’20; -10% BS(e) for 2020e), UNI has reinstated the fees that it froze during the lockdown (ATMs, POSs, etc.), increased fees starting in 3Q’20 and also recovered transaction banking. In costs (-4% in 1H’20; -3% BS(e) in 2020e) UNI will continue to focus on cuts, reiterating its target of an annual reduction in 2019-22e of -3%, with the associated restructuring costs (€ -400 M) already provisioned in the past few years.
 CoR and loan quality: For the time being the NPL ratio in 3Q’20 has not risen, and in fact the bank is not even seeing a transfer of Stage 1 loans (up-to-date with payments) to Stage 2 (doubtful). That said, the bank has reiterated its CoR’20 guidance of 50-90bps, despite having made € 100 M of early provisions due to Covid-19 in 1H’20 (CoR 89bps, of which 72bps stems from anticipating default and vs. 80bps CoR’20 BS(e)). Uncertainty is still very high, and UNI prefers to be cautious. In this regard, in its model to calculate expected losses it does not comprehensively include Govt./ECB measures (furloughs, guaranteed minimum income, etc.) that will reduce the pandemic’s impact on the economy. As for the guidance’21, we do not expect it to be given until 4Q’20, given the current lack of visibility on the public health crisis. Thus, UNI believes that 2020 is a year of provisions, even if there is no drop in loan quality. That said, the bank does not think it is at risk of incurring losses or a need for capital, even in the worst-case scenario.
 Capital and dividends: The excess capital (CET1 of 14.4% in 1H’20; total phased-in capital 17.3% with an excess of € 1.18 Bn over the required level) gives the bank leeway to look at different paths to take. Although the current uncertainty makes retaining a capital buffer necessary, UNI will resume its remuneration policy (dividends + share buybacks) when the ECB allows, and it will continue to study capital employment options that could generate value for shareholders.
MARKET IMPACT
The messages from the RS confirm our opinion that UNI is a bank that is being managed very prudently, leading it to have one of the strongest balance sheets in the sector in terms of capital, coverage, credit risk profile and liquidity. At the same time, and despite the low medium-term visibility, the bank has the internal levers to continue to shore up revenues, costs and Net Profit next year, as well as the excess capital to take more measures (restructuring, raising coverage levels to lower sustainable CoR) to improve profitability if needed, and this is not priced in looking at the current share price. Lastly, and regarding M&A, the messages were rather vague, but we still believe that given the strong balance sheet, UNI is a clear candidate to lead M&A moves with banks of a similar profile, such as Liberbank. At current levels, the respective share prices are factoring in a ratio of 40% LBK / 60% UNI, a good starting point to resume negotiations, which could lead to a somewhat more favourable ratio for Liberbank (42%/58%). We reiterate our BUY recommendation.