2015_03_02_CABK Investor Day Cheat Sheet
AndreaFiltri
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Jul 21, 2015
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About This Presentation
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Slide Content
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
IMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research department of Mediobanca S.p.A. (parent company of
Mediobanca Securities USA LLC (“MBUSA”)) and it is distributed in the United States by MBUSA which accepts responsibility for its content. The research analyst(s) named on
this report are not registered / qualified as research analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussed
herein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers.
Caixa Bank
02 March 2015 Banks Update
Investor Day Cheat Sheet
Andrea Filtri
Equity Analyst
New investment case: from „cash cow to be‟ to ‘Iberian restructuring story‟
CABK has been building up as a story of: domestic banking restructuring, capital
free up from stakes and sound balance sheet from premium capital and coverage
ratios. But the bid on BPI and the upcoming sale of Novo Banco (NB) could
transform CABK’s story. Portugal could be a large swing factor for CABK and the
BPI bid takes full control of it. The potential integration of BPI/NB into CABK
could create ‘Bank of Iberia’. This compelling restructuring story in EU periphery
- just as the economy recovers – would lose CABK the cashback and premium
capital angles. We expect tomorrow’s Investor Day to provide further colour.
Equity stakes: 196bp CET1 cushion vs c.40% of 2015E ROTE
We estimate the capital consumption of each stake at CABK and identify on
aggregate 188bp of CET1 ratio (87bp from REP and TEF, 101bp from FIG stakes).
The full sale of the portfolio would boost CET1 by 196bp, 80% from FIG stakes,
20% from industrial ones. 70% of the CET1 benefit would come from RWA
reduction and 30% from the reversal of goodwill deductions, while capital
deductions offset net losses from MTM. So, stakes represent a thick capital
buffer for CABK to fund growth and/or face regulatory hurdles. 2.7 p.p. ROTE
erosion is the negative, with TEF as the largest contributor (70bp) and Bank of
East Asia (BEA) minimizing RoTE hits while maximizing CET1 boost.
350bp CET1 gearing (M&A and regulation) vs 280bp CET1 cushions (stakes)
CABK reported a high 12.3% FL CET1 ratio, yet excess capital is hard to pinpoint
as we estimate 350bp potential erosion from regulation (140bp) and acquisitions
(210bp). On the former: the lifting of the Danish Compromise (90bp), the
introduction of 10% risk weight on govies (20bp) and their implications for DTAs
(30bp). On the latter, we see the sale of equity stakes (200bp), 25% minorities in
BPI (30bp) and the further re-levering of VidaCaixa (50bp).
CABK/BPI/NB, the ‘Bank of Iberia‟: 6% EPS accretion post €5.5bn capital hike
The BPI bid at 0.9x P/TE looks generous based on the low profitability (post
African exit) and synergy visibility. But we believe this the stepping stone to get
to creating Portugal’s and Iberia’s #1 banks through the CABK/BPI/NB merger.
The Portuguese merger would provide for €291m visible after tax cost synergies,
leading to 6% boost to CABK’s 3-yr EPS. Excluding stake disposals, CABK would
need €5.5bn rights issue to defend 11% CET1 ratio (in line with co. targets).
CABK is a recovery play through balance sheet growth; not a low cost model
Spanish banks overhauled their business model during the crisis with over 1/3
branch closures and 25% loan deleverage. Instead, CABK maintained a large
network (2x the peer avg.) of smaller branches requiring higher fixed costs in
exchange of stronger and cheaper deposit gathering. We estimate realigning
branch productivity to peer avg. would boost EPS by 12% vs 18% by cutting costs
in line with competitors. This means CABK is positioned for superior balance
sheet growth in a recovery while peers embody the operating leverage play.
30% valuation swing to our TP – Staying Neutral while awaiting developments
We estimate 20% upside to our €4.4 TP jointly from the BPI/NB takeover funded
by a cash call (+9%) and from the CABK realignment to peer profitability (+11%
both for cost cutting and branch productivity). Instead, we see 9% downside
from the BPI/NB takeover funded by stake disposals and CET1 gearing. This
indicates that valuation is positively skewed to management action.
+44 203 0369 571
[email protected]
Andres Williams
Equity Analyst
+44 203 0369 577
[email protected]
Source: Mediobanca Securities Price: € 4.11 Target price: € 4.40 Neutral 20142015E2016E2017E
EPS Adj (€) 0.110.260.380.48
DPS (€) 0.090.150.230.29
TBVPS (€) 3.563.593.733.99
Avg. RoTE Adj (%)3.0%7.2%10.3%12.4%
P/E Adj (x) 37.916.010.9 8.6
Div.Yield(%) 2.3%3.7%5.5%7.0%
P/TBV (x) 1.21.1 1.1 1.0 Market Data
Market Cap (€m) 23,489
Shares Out (m) 5,715
Main Shareholder Name (%) 10%
Free Float (%) 60%
52 week range (€) 4.92-3.83
Rel Perf vs STOXX EUROPE 600 BANKS E (%)
-1m -0.7%
-3m -12.9%
-12m -11.6%
21dd Avg. Vol. 22,247,312
Reuters/Bloomberg CABK.MC / CABK SM
This report is intended for [email protected] from [email protected]
IMPORTANT DISCLOSURE FOR U.S. INVESTORS: This document is prepared by Mediobanca Securities, the equity research department of Mediobanca S.p.A. (parent company of
Mediobanca Securities USA LLC (“MBUSA”)) and it is distributed in the United States by MBUSA which accepts responsibility for its content. The research analyst(s) named on
this report are not registered / qualified as research analysts with Finra. Any US person receiving this document and wishing to effect transactions in any securities discussed
herein should do so with MBUSA, not Mediobanca S.p.A.. Please refer to the last pages of this document for important disclaimers.
Caixa Bank
02 March 2015 Banks Update
Investor Day Cheat Sheet
Andrea Filtri
Equity Analyst
New investment case: from „cash cow to be‟ to ‘Iberian restructuring story‟
CABK has been building up as a story of: domestic banking restructuring, capital
free up from stakes and sound balance sheet from premium capital and coverage
ratios. But the bid on BPI and the upcoming sale of Novo Banco (NB) could
transform CABK’s story. Portugal could be a large swing factor for CABK and the
BPI bid takes full control of it. The potential integration of BPI/NB into CABK
could create ‘Bank of Iberia’. This compelling restructuring story in EU periphery
- just as the economy recovers – would lose CABK the cashback and premium
capital angles. We expect tomorrow’s Investor Day to provide further colour.
Equity stakes: 196bp CET1 cushion vs c.40% of 2015E ROTE
We estimate the capital consumption of each stake at CABK and identify on
aggregate 188bp of CET1 ratio (87bp from REP and TEF, 101bp from FIG stakes).
The full sale of the portfolio would boost CET1 by 196bp, 80% from FIG stakes,
20% from industrial ones. 70% of the CET1 benefit would come from RWA
reduction and 30% from the reversal of goodwill deductions, while capital
deductions offset net losses from MTM. So, stakes represent a thick capital
buffer for CABK to fund growth and/or face regulatory hurdles. 2.7 p.p. ROTE
erosion is the negative, with TEF as the largest contributor (70bp) and Bank of
East Asia (BEA) minimizing RoTE hits while maximizing CET1 boost.
350bp CET1 gearing (M&A and regulation) vs 280bp CET1 cushions (stakes)
CABK reported a high 12.3% FL CET1 ratio, yet excess capital is hard to pinpoint
as we estimate 350bp potential erosion from regulation (140bp) and acquisitions
(210bp). On the former: the lifting of the Danish Compromise (90bp), the
introduction of 10% risk weight on govies (20bp) and their implications for DTAs
(30bp). On the latter, we see the sale of equity stakes (200bp), 25% minorities in
BPI (30bp) and the further re-levering of VidaCaixa (50bp).
CABK/BPI/NB, the ‘Bank of Iberia‟: 6% EPS accretion post €5.5bn capital hike
The BPI bid at 0.9x P/TE looks generous based on the low profitability (post
African exit) and synergy visibility. But we believe this the stepping stone to get
to creating Portugal’s and Iberia’s #1 banks through the CABK/BPI/NB merger.
The Portuguese merger would provide for €291m visible after tax cost synergies,
leading to 6% boost to CABK’s 3-yr EPS. Excluding stake disposals, CABK would
need €5.5bn rights issue to defend 11% CET1 ratio (in line with co. targets).
CABK is a recovery play through balance sheet growth; not a low cost model
Spanish banks overhauled their business model during the crisis with over 1/3
branch closures and 25% loan deleverage. Instead, CABK maintained a large
network (2x the peer avg.) of smaller branches requiring higher fixed costs in
exchange of stronger and cheaper deposit gathering. We estimate realigning
branch productivity to peer avg. would boost EPS by 12% vs 18% by cutting costs
in line with competitors. This means CABK is positioned for superior balance
sheet growth in a recovery while peers embody the operating leverage play.
30% valuation swing to our TP – Staying Neutral while awaiting developments
We estimate 20% upside to our €4.4 TP jointly from the BPI/NB takeover funded
by a cash call (+9%) and from the CABK realignment to peer profitability (+11%
both for cost cutting and branch productivity). Instead, we see 9% downside
from the BPI/NB takeover funded by stake disposals and CET1 gearing. This
indicates that valuation is positively skewed to management action.
+44 203 0369 571
[email protected]
Andres Williams
Equity Analyst
+44 203 0369 577
[email protected]
Source: Mediobanca Securities Price: € 4.11 Target price: € 4.40 Neutral 20142015E2016E2017E
EPS Adj (€) 0.110.260.380.48
DPS (€) 0.090.150.230.29
TBVPS (€) 3.563.593.733.99
Avg. RoTE Adj (%)3.0%7.2%10.3%12.4%
P/E Adj (x) 37.916.010.9 8.6
Div.Yield(%) 2.3%3.7%5.5%7.0%
P/TBV (x) 1.21.1 1.1 1.0 Market Data
Market Cap (€m) 23,489
Shares Out (m) 5,715
Main Shareholder Name (%) 10%
Free Float (%) 60%
52 week range (€) 4.92-3.83
Rel Perf vs STOXX EUROPE 600 BANKS E (%)
-1m -0.7%
-3m -12.9%
-12m -11.6%
21dd Avg. Vol. 22,247,312
Reuters/Bloomberg CABK.MC / CABK SM
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
Caixa Bank
02 March 2015 ◆ 2
Price: € 4.11 Target price: € 4.40 Neutral
Valuation Matrix
Source: Mediobanca Securities
Source: Mediobanca Securities
Profit & Loss Acc(€ m) 2014 2015E 2016E 2017E Multiples 2014 2015E 2016E 2017E
Net Interest Income 4,155 4,830 5,225 5,672 P/E 37.9 16.0 10.9 8.6
Growth (%) 5.1% 16.3% 8.2% 8.6% P/E Adj. 37.9 16.0 10.9 8.6
Non-Interest Income 2,785 2,793 3,174 3,431 P/Net Op.Income 7.4 6.3 5.4 4.8
Growth (%) 15.6% 0.3% 13.6% 8.1% P/Revenues 3.4 3.1 2.9 2.6
of which Fee Income 1,825 2,026 2,087 2,107 P/TBV 1.2 1.1 1.1 1.0
of which Financial Income 640 275 275 275 P/Total Deposits (%) 13.0% 12.0% 11.8% 11.5%
Total Income 6,940 7,623 8,398 9,103 Yield (%) 2.3% 3.7% 5.5% 7.0%
Growth (%) 9.0% 9.8% 10.2% 8.4%
Total Costs -3,773-3,840-3,991-4,056
Growth (%) -21.2% 1.8% 3.9% 1.6%
of which Personnel Costs -2,578-2,625-2,756-2,799
Net Operating Income 3,167 3,783 4,408 5,047
Growth (%) 100.6% 19.5% 16.5% 14.5%
Provisions&Write-downs -2,579-1,703-1,520-1,360 Per Share Data (€) 2014 2015E 2016E 2017E
Extraordinary Items na na na na EPS 0.11 0.26 0.38 0.48
Pre-tax profit 202 1,968 2,888 3,687 EPS growth (%) 72.6%136.1% 46.7% 27.7%
Tax 418 -472 -693 -885 EPS Adj. 0.11 0.26 0.38 0.48
Tax rate(%) -206.9% 24.0% 24.0% 24.0% EPS Adj. growth (%) -55.6%136.1% 46.7% 27.7%
Minorities and others 0 0 0 0 TBVPS 3.56 3.59 3.73 3.99
Net profit 620 1,496 2,195 2,802 DPS Ord 0.09 0.15 0.23 0.29
Growth (%) 96.2%141.3% 46.7% 27.7%
Adjusted net profit 620 1,496 2,195 2,802
Growth (%) -53.9%141.3% 46.7% 27.7%
Balance Sheet (€ m) 2014 2015E 2016E 2017E Key Figures & Ratios 2014 2015E 2016E 2017E
Customer Loans 188,762205,751209,866219,310 Avg. N° of Shares (m) 5,712 5,836 5,836 5,836
Growth(%) -4.7% 9.0% 2.0% 4.5% EoP N° of Shares (m) na na na na
Customer Deposits 180,200200,022204,022208,103 Avg. Market Cap. (m) 25,54223,98723,98723,987
Growth(%) 2.9% 11.0% 2.0% 2.0%
Shareholders' Funds 23,99324,59525,47327,014 NII/Total Income (%) 59.9% 63.4% 62.2% 62.3%
Minorities 9 9 9 9 Fees/Total Income (%) 26.3% 26.6% 24.8% 23.1%
Total Assets 339,252361,443368,133375,612 Trading/Total Income (%) 9.2% 3.6% 3.3% 3.0%
Cost Income ratio 54.4% 50.4% 47.5% 44.6%
Personnel costs/Total costs68.3% 68.4% 69.1% 69.0%
Impairment/Average Loans 1.3% 0.9% 0.7% 0.6%
NPLs ratio 10.7% 9.0% 8.1% 6.9%
Provisions/Loans 5.9% 5.0% 4.4% 3.8%
Avg. RoTE Adj. (%) 3.0% 7.2% 10.3% 12.4%
ROA (%) 0.18% 0.42% 0.61% 0.75%
Tier 1 ratio 13.1% 13.3% 13.7% 14.1%
Basel III Core Tier 1 ratio12.1% 12.4% 12.7% 13.2% 3.80
4.00
4.20
4.40
4.60
4.80
5.00
M A M J J A S O N D J F
Caixa Bank STOXX EUROPE 600 BANKS E
2/03/15
This report is intended for [email protected] from [email protected]
Caixa Bank
02 March 2015 ◆ 2
Price: € 4.11 Target price: € 4.40 Neutral
Valuation Matrix
Source: Mediobanca Securities
Source: Mediobanca Securities
Profit & Loss Acc(€ m) 2014 2015E 2016E 2017E Multiples 2014 2015E 2016E 2017E
Net Interest Income 4,155 4,830 5,225 5,672 P/E 37.9 16.0 10.9 8.6
Growth (%) 5.1% 16.3% 8.2% 8.6% P/E Adj. 37.9 16.0 10.9 8.6
Non-Interest Income 2,785 2,793 3,174 3,431 P/Net Op.Income 7.4 6.3 5.4 4.8
Growth (%) 15.6% 0.3% 13.6% 8.1% P/Revenues 3.4 3.1 2.9 2.6
of which Fee Income 1,825 2,026 2,087 2,107 P/TBV 1.2 1.1 1.1 1.0
of which Financial Income 640 275 275 275 P/Total Deposits (%) 13.0% 12.0% 11.8% 11.5%
Total Income 6,940 7,623 8,398 9,103 Yield (%) 2.3% 3.7% 5.5% 7.0%
Growth (%) 9.0% 9.8% 10.2% 8.4%
Total Costs -3,773-3,840-3,991-4,056
Growth (%) -21.2% 1.8% 3.9% 1.6%
of which Personnel Costs -2,578-2,625-2,756-2,799
Net Operating Income 3,167 3,783 4,408 5,047
Growth (%) 100.6% 19.5% 16.5% 14.5%
Provisions&Write-downs -2,579-1,703-1,520-1,360 Per Share Data (€) 2014 2015E 2016E 2017E
Extraordinary Items na na na na EPS 0.11 0.26 0.38 0.48
Pre-tax profit 202 1,968 2,888 3,687 EPS growth (%) 72.6%136.1% 46.7% 27.7%
Tax 418 -472 -693 -885 EPS Adj. 0.11 0.26 0.38 0.48
Tax rate(%) -206.9% 24.0% 24.0% 24.0% EPS Adj. growth (%) -55.6%136.1% 46.7% 27.7%
Minorities and others 0 0 0 0 TBVPS 3.56 3.59 3.73 3.99
Net profit 620 1,496 2,195 2,802 DPS Ord 0.09 0.15 0.23 0.29
Growth (%) 96.2%141.3% 46.7% 27.7%
Adjusted net profit 620 1,496 2,195 2,802
Growth (%) -53.9%141.3% 46.7% 27.7%
Balance Sheet (€ m) 2014 2015E 2016E 2017E Key Figures & Ratios 2014 2015E 2016E 2017E
Customer Loans 188,762205,751209,866219,310 Avg. N° of Shares (m) 5,712 5,836 5,836 5,836
Growth(%) -4.7% 9.0% 2.0% 4.5% EoP N° of Shares (m) na na na na
Customer Deposits 180,200200,022204,022208,103 Avg. Market Cap. (m) 25,54223,98723,98723,987
Growth(%) 2.9% 11.0% 2.0% 2.0%
Shareholders' Funds 23,99324,59525,47327,014 NII/Total Income (%) 59.9% 63.4% 62.2% 62.3%
Minorities 9 9 9 9 Fees/Total Income (%) 26.3% 26.6% 24.8% 23.1%
Total Assets 339,252361,443368,133375,612 Trading/Total Income (%) 9.2% 3.6% 3.3% 3.0%
Cost Income ratio 54.4% 50.4% 47.5% 44.6%
Personnel costs/Total costs68.3% 68.4% 69.1% 69.0%
Impairment/Average Loans 1.3% 0.9% 0.7% 0.6%
NPLs ratio 10.7% 9.0% 8.1% 6.9%
Provisions/Loans 5.9% 5.0% 4.4% 3.8%
Avg. RoTE Adj. (%) 3.0% 7.2% 10.3% 12.4%
ROA (%) 0.18% 0.42% 0.61% 0.75%
Tier 1 ratio 13.1% 13.3% 13.7% 14.1%
Basel III Core Tier 1 ratio12.1% 12.4% 12.7% 13.2% 3.80
4.00
4.20
4.40
4.60
4.80
5.00
M A M J J A S O N D J F
Caixa Bank STOXX EUROPE 600 BANKS E
2/03/15
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
Caixa Bank
02 March 2015 ◆ 3
Price: € 4.11 Target price: € 4.40 Neutral
Contents
Valuation Matrix 2
Capital is abundant; not unlimited 4
Stakes: much accomplished; much further to go… 5
Stake sales + mitigation vs regulation threat and M&A 12
Building the second home market 17
CABK is not playing the low cost game 29
30% swing around our €4.4 TP – Staying Neutral
34
This report is intended for [email protected] from [email protected]
Caixa Bank
02 March 2015 ◆ 3
Price: € 4.11 Target price: € 4.40 Neutral
Contents
Valuation Matrix 2
Capital is abundant; not unlimited 4
Stakes: much accomplished; much further to go… 5
Stake sales + mitigation vs regulation threat and M&A 12
Building the second home market 17
CABK is not playing the low cost game 29
30% swing around our €4.4 TP – Staying Neutral
34
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
Caixa Bank
02 March 2015 ◆ 4
Price: € 4.11 Target price: € 4.40 Neutral
Capital is abundant; not unlimited
CABK reported 11.6% CET1 fully loaded ratio in Q414, a high level but down 110bp
from Q314 from the acquisition of Barclays Spain and the change in treatment of
Deposit Guarantee charges. The co. anticipated CET1 could fall to 10.4% if the offer
on BPI completes successfully but it targets 11% post BPI acquisition, implying capital
management actions. This means CABK should still retain a good level of capitalisation
but the premium ratio vs peers will go and there will be little capital excess. CABK has
ample room to act on capital ratios, particularly through the management of equity
stakes. Yet, M&A will likely remain a topic on the table, so we expect capital ratios
and allocation to take the pivotal role at tomorrow’s Investor Day.
CET1 ratio is high but it has been drifting down...
Chart 1 shows the evolution of the CABK CET1 fully loaded ratio over the last 18 months. The 11.6%
level disclosed on Q414 results is very sound in a European context, but this has slipped by 110bp in
the last two quarters on the back of the change in treatment of the Deposit Guarantee Fund (DGF)
and of the Barclays Spain acquisition and it is likely to further slip by c.110bp if the bid on BPI will
be successful. This would take CET1 ratio to 10.4%, no longer at premium vs peers. The company is
targeting 11% post BPI transaction, implying capital actions are in sight, in our view.
...suggesting that capital will be one of the main pillars of the next Business Plan
We believe that capital will be one of the main pillars of the upcoming Business Plan. The previous
three years have worked towards the repositioning of CABK on domestic retail banking and away
from the origin of holding of stakes. On the capital front, this has been implemented around three
directories:
1) Industrial stake disposals;
2) Acquisitions/integrations of domestic banking competitors;
3) Capital optimisation for Basel 3 implementation.
We believe the next Plan will complete the repositioning process and capital will have to be the
main driver to fund this change.
Chart 1: CABK CET1 ratio fully loaded evolution
Source: Mediobanca Securities, company data
8.3%
11.7%
12.1%
12.4%
12.7%
12.3%
11.6%
10.4%
0%
2%
4%
6%
8%
10%
12%
14%
This report is intended for [email protected] from [email protected]
Caixa Bank
02 March 2015 ◆ 4
Price: € 4.11 Target price: € 4.40 Neutral
Capital is abundant; not unlimited
CABK reported 11.6% CET1 fully loaded ratio in Q414, a high level but down 110bp
from Q314 from the acquisition of Barclays Spain and the change in treatment of
Deposit Guarantee charges. The co. anticipated CET1 could fall to 10.4% if the offer
on BPI completes successfully but it targets 11% post BPI acquisition, implying capital
management actions. This means CABK should still retain a good level of capitalisation
but the premium ratio vs peers will go and there will be little capital excess. CABK has
ample room to act on capital ratios, particularly through the management of equity
stakes. Yet, M&A will likely remain a topic on the table, so we expect capital ratios
and allocation to take the pivotal role at tomorrow’s Investor Day.
CET1 ratio is high but it has been drifting down...
Chart 1 shows the evolution of the CABK CET1 fully loaded ratio over the last 18 months. The 11.6%
level disclosed on Q414 results is very sound in a European context, but this has slipped by 110bp in
the last two quarters on the back of the change in treatment of the Deposit Guarantee Fund (DGF)
and of the Barclays Spain acquisition and it is likely to further slip by c.110bp if the bid on BPI will
be successful. This would take CET1 ratio to 10.4%, no longer at premium vs peers. The company is
targeting 11% post BPI transaction, implying capital actions are in sight, in our view.
...suggesting that capital will be one of the main pillars of the next Business Plan
We believe that capital will be one of the main pillars of the upcoming Business Plan. The previous
three years have worked towards the repositioning of CABK on domestic retail banking and away
from the origin of holding of stakes. On the capital front, this has been implemented around three
directories:
1) Industrial stake disposals;
2) Acquisitions/integrations of domestic banking competitors;
3) Capital optimisation for Basel 3 implementation.
We believe the next Plan will complete the repositioning process and capital will have to be the
main driver to fund this change.
Chart 1: CABK CET1 ratio fully loaded evolution
Source: Mediobanca Securities, company data
8.3%
11.7%
12.1%
12.4%
12.7%
12.3%
11.6%
10.4%
0%
2%
4%
6%
8%
10%
12%
14%
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
Caixa Bank
02 March 2015 ◆ 5
Price: € 4.11 Target price: € 4.40 Neutral
Stakes: much accomplished; much further to go…
Since its listing, CABK reduced the weight of equity stakes. Yet, these still generated
37% of 2014 profits while absorbing c.190bp of CET1 ratio (16% of group capital), for
an estimated 18% ROAC. Not all stakes are the same: industrial co. and FIG >10%
absorb c.90bp CET1 ratio each, while FIG <10% require less than 20bp. Yet, of the
c.200bp CET1 boost from an outright sale of the stakes portfolio, the impact from
different stakes is very asymmetric: Repsol is neutral, Telefonica generates 40bp, FIG
>10% 82bp (of which 50bp from the removal of capital deductions) and FIG <10% 77bp
of which 63bp from GF Inbursa. The counter argument for a sale is that the stakes
generate 2.7 p.p. ROTE for CABK out of 7% 2015E at group level. Telefonica is the
largest single contributor (0.7 p.p.), FIG stakes >10% produce only 0.4 p.p. and FIG
<10% are large generate 1.2 p.p.. Our analysis allows us to cherry pick the
management actions which maximise capital benefits from sales while minimising the
negative hit to group ROTE: the 19% stake in Bank of East Asia is top of the list.
Several disposals have already been made...
Since its IPO, CABK started the sale down of the industrial portfolio. We recall:
the 5% stake sale in BME;
the 3.7%, 6.4% and 0.89% stake sales in GF Inbursa;
the issuance of a mandatory convertible bond for a 2.5% stake in Repsol.
Not all operations on the stakes have been disposals. We also remind of the acquisition of 3.5m new
shares in Erste Bank (EBS), taking the overall stake to 9.9% from 9.1% previously. This move signals
CABK has not resolutely embarked on the full stake disposal path, in our view and we expect the
upcoming Business Plan to shed full light on this item. In this chapter we go in detail over the
current capital absorption of stakes and what further
...but stakes still absorb 188bp CET1 FL...
Table 1 shows the summary of the remaining stakes portfolio at CABK. This amounts to €11.4bn
carrying value split in €6.6bn in industrial companies (Repsol and Telefonica) and €4.8bn in financial
companies of which €3bn in banks with over 10% shareholding (Bank of East Asia, BPI, Boursorama)
and €1.7bn in banks with shareholding below 10% (EBS, GF Inbursa).
We calculate the portfolio carries €0.9bn goodwill, €0.8bn latent losses largely concentrated in
Repsol, BEA and BPI and partly offset by the gains in GF Inbursa.
We calculate the stakes portfolio jointly consumes 188bp of CET1 ratio, for 16% of group capital.
Within this, we see three types of stakes whose capital consumption differs from the others:
1) industrial stakes;
2) financial stakes with CABK shareholding >10%;
3) financial stakes with CABK shareholding <10%.
Industrial stakes absorbing 87bp - The first group constitutes of Repsol (REP) and Telefonica (TEF).
The former stake is strategic, the latter is classified as available for sale (AFS). This means that REP
is equity consolidated while TEF enters CABK’s P&L through dividends. These stakes are both risk
weighted at 200% and 150%, respectively, for €10bn total contribution to group capital. While TEF is
AFS and therefore subject to mark to market valuation every quarter, we estimate REP is carrying a
latent loss for €0.7bn.
FIG stakes >10% absorbing 85bp - The second group constitutes of Bank of East Asia (BEA), BPI and
and Boursorama. These stakes are equity consolidated and for capital reasons their BVs (€2.4bn, i.e.
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Stakes: much accomplished; much further to go…
Since its listing, CABK reduced the weight of equity stakes. Yet, these still generated
37% of 2014 profits while absorbing c.190bp of CET1 ratio (16% of group capital), for
an estimated 18% ROAC. Not all stakes are the same: industrial co. and FIG >10%
absorb c.90bp CET1 ratio each, while FIG <10% require less than 20bp. Yet, of the
c.200bp CET1 boost from an outright sale of the stakes portfolio, the impact from
different stakes is very asymmetric: Repsol is neutral, Telefonica generates 40bp, FIG
>10% 82bp (of which 50bp from the removal of capital deductions) and FIG <10% 77bp
of which 63bp from GF Inbursa. The counter argument for a sale is that the stakes
generate 2.7 p.p. ROTE for CABK out of 7% 2015E at group level. Telefonica is the
largest single contributor (0.7 p.p.), FIG stakes >10% produce only 0.4 p.p. and FIG
<10% are large generate 1.2 p.p.. Our analysis allows us to cherry pick the
management actions which maximise capital benefits from sales while minimising the
negative hit to group ROTE: the 19% stake in Bank of East Asia is top of the list.
Several disposals have already been made...
Since its IPO, CABK started the sale down of the industrial portfolio. We recall:
the 5% stake sale in BME;
the 3.7%, 6.4% and 0.89% stake sales in GF Inbursa;
the issuance of a mandatory convertible bond for a 2.5% stake in Repsol.
Not all operations on the stakes have been disposals. We also remind of the acquisition of 3.5m new
shares in Erste Bank (EBS), taking the overall stake to 9.9% from 9.1% previously. This move signals
CABK has not resolutely embarked on the full stake disposal path, in our view and we expect the
upcoming Business Plan to shed full light on this item. In this chapter we go in detail over the
current capital absorption of stakes and what further
...but stakes still absorb 188bp CET1 FL...
Table 1 shows the summary of the remaining stakes portfolio at CABK. This amounts to €11.4bn
carrying value split in €6.6bn in industrial companies (Repsol and Telefonica) and €4.8bn in financial
companies of which €3bn in banks with over 10% shareholding (Bank of East Asia, BPI, Boursorama)
and €1.7bn in banks with shareholding below 10% (EBS, GF Inbursa).
We calculate the portfolio carries €0.9bn goodwill, €0.8bn latent losses largely concentrated in
Repsol, BEA and BPI and partly offset by the gains in GF Inbursa.
We calculate the stakes portfolio jointly consumes 188bp of CET1 ratio, for 16% of group capital.
Within this, we see three types of stakes whose capital consumption differs from the others:
1) industrial stakes;
2) financial stakes with CABK shareholding >10%;
3) financial stakes with CABK shareholding <10%.
Industrial stakes absorbing 87bp - The first group constitutes of Repsol (REP) and Telefonica (TEF).
The former stake is strategic, the latter is classified as available for sale (AFS). This means that REP
is equity consolidated while TEF enters CABK’s P&L through dividends. These stakes are both risk
weighted at 200% and 150%, respectively, for €10bn total contribution to group capital. While TEF is
AFS and therefore subject to mark to market valuation every quarter, we estimate REP is carrying a
latent loss for €0.7bn.
FIG stakes >10% absorbing 85bp - The second group constitutes of Bank of East Asia (BEA), BPI and
and Boursorama. These stakes are equity consolidated and for capital reasons their BVs (€2.4bn, i.e.
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€3bn carrying value minus €0.6bn goodwill) screen against a buffer at 10% of capital (€1.7bn). The
portion below the bar is 250% risk-weighted for €4.2bn RWA; the one above is a straight deduction.
FIG stakes <10% absorbing 16bp - The third group constitutes of GF Inbursa and EBS. These stakes
are equity consolidated and for capital reasons their BVs (€1.7bn minus €0.3bn goodwill) are risk
weighted at 140% for €2bn RWAs.
...so that more core business growth or regulatory pressure could require more sales
€2bn capital locked into the stakes portfolio signals that this is still a very large part of the CABK
group. Hence, we look at stakes as a large reserve for the future and expect management to
indicate how they intend to administer it in the face of any further, material growth in the core
businesses or in case of potential further regulatory pressures which could come from the likely
harmonisation of capital rules.
Complete sale releasing 196bp of CET1 ratio...
Table 2 shows the CET1 impact from the sale of the equity stakes. We calculate the impact from
four factors:
1) the recovery of the goodwill deduction from capital;
2) the mark to market gain/loss of the stake compared to the carrying book value;
3) the RWA reduction;
4) the removal of the capital deduction from the BV of FIG stakes exceeding 10% of capital.
We estimate that the sale tout court of all stakes would generate 196bp higher CET1 ratio, taking
CABK virtually to 13.6%, one of Europe’s highest ratios.
Table 1: summary of CABK stakes and impact to FL CET1 ratio, 2014
Stake
Carrying
value
Goodwill Mkt Cap Gain/loss
Risk
weight
RWA CET1 Goodwill
CET1
today bp
Repsol 11.90% 3,367
22,724 (663) 200% 5,320 619
0.44%
Telefonica 5.25% 3,213
61,196 - 150% 4,819 561
0.40%
GF Inbursa 9.01% 868 299 15,439 523 140% 797 93 299
BEA 18.68% 1,925 568 8,616 (316)
568
EBS 9.92% 870
9,411 64 140% 1,218 142 -
BPI 44.10% 939
1,356 (341)
-
Boursorama 20.46% 178 66 696 (36)
66
Industrial companies
6,580 - 83,920 (663)
10,139 1,180 - 0.87%
FIG stakes >10%
3,042 634 10,668 (692)
4,218 491 634 0.85%
...deductions
721
0.50%
FIG stakes <10%
1,738 299 24,850 587
2,015 234 299 0.16%
Total FIG. Stakes
4,780 933 35,517 (106)
6,232 955 933 1.01%
Tot. Stakes
11,360 933 119,437 (769)
16,371 2,135 933 1.88%
Source: Mediobanca Securities, company data
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€3bn carrying value minus €0.6bn goodwill) screen against a buffer at 10% of capital (€1.7bn). The
portion below the bar is 250% risk-weighted for €4.2bn RWA; the one above is a straight deduction.
FIG stakes <10% absorbing 16bp - The third group constitutes of GF Inbursa and EBS. These stakes
are equity consolidated and for capital reasons their BVs (€1.7bn minus €0.3bn goodwill) are risk
weighted at 140% for €2bn RWAs.
...so that more core business growth or regulatory pressure could require more sales
€2bn capital locked into the stakes portfolio signals that this is still a very large part of the CABK
group. Hence, we look at stakes as a large reserve for the future and expect management to
indicate how they intend to administer it in the face of any further, material growth in the core
businesses or in case of potential further regulatory pressures which could come from the likely
harmonisation of capital rules.
Complete sale releasing 196bp of CET1 ratio...
Table 2 shows the CET1 impact from the sale of the equity stakes. We calculate the impact from
four factors:
1) the recovery of the goodwill deduction from capital;
2) the mark to market gain/loss of the stake compared to the carrying book value;
3) the RWA reduction;
4) the removal of the capital deduction from the BV of FIG stakes exceeding 10% of capital.
We estimate that the sale tout court of all stakes would generate 196bp higher CET1 ratio, taking
CABK virtually to 13.6%, one of Europe’s highest ratios.
Table 1: summary of CABK stakes and impact to FL CET1 ratio, 2014
Stake
Carrying
value
Goodwill Mkt Cap Gain/loss
Risk
weight
RWA CET1 Goodwill
CET1
today bp
Repsol 11.90% 3,367
22,724 (663) 200% 5,320 619
0.44%
Telefonica 5.25% 3,213
61,196 - 150% 4,819 561
0.40%
GF Inbursa 9.01% 868 299 15,439 523 140% 797 93 299
BEA 18.68% 1,925 568 8,616 (316)
568
EBS 9.92% 870
9,411 64 140% 1,218 142 -
BPI 44.10% 939
1,356 (341)
-
Boursorama 20.46% 178 66 696 (36)
66
Industrial companies
6,580 - 83,920 (663)
10,139 1,180 - 0.87%
FIG stakes >10%
3,042 634 10,668 (692)
4,218 491 634 0.85%
...deductions
721
0.50%
FIG stakes <10%
1,738 299 24,850 587
2,015 234 299 0.16%
Total FIG. Stakes
4,780 933 35,517 (106)
6,232 955 933 1.01%
Tot. Stakes
11,360 933 119,437 (769)
16,371 2,135 933 1.88%
Source: Mediobanca Securities, company data
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Individually, we identify Repsol as the exposure with the largest negative impact in case of sale
with 3bp erosion. On the other hand, GF Inbursa is the stake with the largest potential positive
impact from a sale with 63bp boost.
...80% from FIG stakes, 20% from industrial stakes...
Chart 2 shows the asymmetry between the distributions of capital absorption and capital release in
case of disposal between industrial stakes, the FIG stakes >10% and FIG stakes <10%. We estimate
that industrial stakes to absorb c.1/2 of capital allocated to stakes through €10bn RWAs. Yet, their
sale would only account for c.1/5 of the capital release from a full stake sale.
Conversely, FIG stakes <10% only absorb c.10% of capital through €2bn RWA but would release c.40%
of the capital release from a full stake sale.
Finally, FIG stakes >10% would generate c.42% of capital release from a full stake sale, currently
consuming 45% of capital.
Table 2: FL CET1 ratio impact from stake sales, 2014
Company Stake
Carrying
value
Good
will
Tot.
mkt
Cap
Gain/
loss
Risk
weight RWA CET1
CET1
today
bp
CET1
from
sale bp
Repsol 11.90% 3,367
22,724 (663) 200% 5,320 619 0.44% -0.03%
Telefonica 5.25% 3,213
61,196 - 150% 4,819 561 0.40% 0.40%
GF Inbursa 9.01% 868 299 15,439 523 140% 797 93
0.63%
BEA 18.68% 1,925 568 8,616 (316)
EBS 9.92% 870
9,411 64 140% 1,218 142
0.14%
BPI 44.10% 939
1,356 (341)
Boursorama 20.46% 178 66 696 (36)
Industrial companies 6,580 - 83,920 (663)
10,139 1,180 0.87% 0.37%
FIG stakes >10%
3,042 634 10,668 (692)
4,218 491 0.85% 0.82%
...deductions
721 0.50% 0.50%
FIG stakes <10%
1,738 299 24,850 587
2,015 234 0.16% 0.77%
Total FIG. Stakes
4,780 933 35,517 (106)
6,232 955 1.01% 1.59%
Tot. Stakes
11,360 933 119,437 (769)
16,371 2,135 1.88% 1.96%
Source: Mediobanca Securities, company data
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Individually, we identify Repsol as the exposure with the largest negative impact in case of sale
with 3bp erosion. On the other hand, GF Inbursa is the stake with the largest potential positive
impact from a sale with 63bp boost.
...80% from FIG stakes, 20% from industrial stakes...
Chart 2 shows the asymmetry between the distributions of capital absorption and capital release in
case of disposal between industrial stakes, the FIG stakes >10% and FIG stakes <10%. We estimate
that industrial stakes to absorb c.1/2 of capital allocated to stakes through €10bn RWAs. Yet, their
sale would only account for c.1/5 of the capital release from a full stake sale.
Conversely, FIG stakes <10% only absorb c.10% of capital through €2bn RWA but would release c.40%
of the capital release from a full stake sale.
Finally, FIG stakes >10% would generate c.42% of capital release from a full stake sale, currently
consuming 45% of capital.
Table 2: FL CET1 ratio impact from stake sales, 2014
Company Stake
Carrying
value
Good
will
Tot.
mkt
Cap
Gain/
loss
Risk
weight RWA CET1
CET1
today
bp
CET1
from
sale bp
Repsol 11.90% 3,367
22,724 (663) 200% 5,320 619 0.44% -0.03%
Telefonica 5.25% 3,213
61,196 - 150% 4,819 561 0.40% 0.40%
GF Inbursa 9.01% 868 299 15,439 523 140% 797 93
0.63%
BEA 18.68% 1,925 568 8,616 (316)
EBS 9.92% 870
9,411 64 140% 1,218 142
0.14%
BPI 44.10% 939
1,356 (341)
Boursorama 20.46% 178 66 696 (36)
Industrial companies 6,580 - 83,920 (663)
10,139 1,180 0.87% 0.37%
FIG stakes >10%
3,042 634 10,668 (692)
4,218 491 0.85% 0.82%
...deductions
721 0.50% 0.50%
FIG stakes <10%
1,738 299 24,850 587
2,015 234 0.16% 0.77%
Total FIG. Stakes
4,780 933 35,517 (106)
6,232 955 1.01% 1.59%
Tot. Stakes
11,360 933 119,437 (769)
16,371 2,135 1.88% 1.96%
Source: Mediobanca Securities, company data
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…and mostly driven by RWA free up with deductions offsetting MTM losses
Chart 3 shows the share of the 196bp contribution to CET1 boost from the sale of the stakes
portfolio. This shows that the c.50bp negative impact to capital from the MTM losses on the stakes
is offset by the removal of the deductions from the FIG stakes >10%. Hence RWA contraction and
the removal of the goodwill deductions essentially account for the entire boost to capital from
stake disposals.
...but denting 2.7 p.p. of RoTE...
Table 3 shows the 2015E return on allocated capital (ROAC) and the dividend yield of CABK’s stakes
and estimates the impact to CABK’s 2105E ROTE from a sale. We estimate allocated capital as:
11.6% of RWAs, in line with CABK’s FL CET1 ratio;
Plus goodwill;
Minus capital gains/losses.
This implies €4.3bn capital absorbed by equity stakes and generating €0.8bn profits (and dividends)
for an average ROAC of 18%. In detail:
Chart 2: distributions of CET1 absorption and of capital free-up from stake disposals
Source: Mediobanca Securities, company data
Chart 3: share of capital relief from stake disposals
Source: Mediobanca Securities, company data
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CET1 absorption Sale
Industrial
FIG >10%
FIG <10%
31%
-25%
71%
24%
Goodwill
Gains/losses
RWA
Deductions
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…and mostly driven by RWA free up with deductions offsetting MTM losses
Chart 3 shows the share of the 196bp contribution to CET1 boost from the sale of the stakes
portfolio. This shows that the c.50bp negative impact to capital from the MTM losses on the stakes
is offset by the removal of the deductions from the FIG stakes >10%. Hence RWA contraction and
the removal of the goodwill deductions essentially account for the entire boost to capital from
stake disposals.
...but denting 2.7 p.p. of RoTE...
Table 3 shows the 2015E return on allocated capital (ROAC) and the dividend yield of CABK’s stakes
and estimates the impact to CABK’s 2105E ROTE from a sale. We estimate allocated capital as:
11.6% of RWAs, in line with CABK’s FL CET1 ratio;
Plus goodwill;
Minus capital gains/losses.
This implies €4.3bn capital absorbed by equity stakes and generating €0.8bn profits (and dividends)
for an average ROAC of 18%. In detail:
Chart 2: distributions of CET1 absorption and of capital free-up from stake disposals
Source: Mediobanca Securities, company data
Chart 3: share of capital relief from stake disposals
Source: Mediobanca Securities, company data
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CET1 absorption Sale
Industrial
FIG >10%
FIG <10%
31%
-25%
71%
24%
Goodwill
Gains/losses
RWA
Deductions
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Industrial stakes consume €1.8bn capital and generate €347m profits (and dividends), for
19% 2015E ROAC;
FIG stakes >10% consume €2.5bn capital and generate €225m profits, for 9% ROAC;
FIG stakes <10% consume -€52m capital on account of €587m MTM gains more than
compensating for the €299m goodwill and the €234m capital absorption from RWAs. This
makes the €186m profit consolidation essentially an infinite ROAC.
Our analysis concludes that the full sale of stakes would lose CABK €0.7bn profits (€0.8bn dividends
and profits minus the €4.3bn capital free up invested on Spanish 3 year bonds at 0.45%), or 50% of
2015E profits for a loss of 2.6 p.p. of RoTE. This would take CABK’s 2015E ROTE from our current
7.2% estimate to 4.5%.
Telefonica the largest single ROTE contributor
Looking at the specific components of the portfolio (see Chart 4) we note that out of the 2.7 p.p.
2015E RoTE loss:
Telefonica is the single stake with the highest ROTE contribution at 0.7%;
FIG stakes <10% (EBS, GF Inbursa) jointly contribute 1.2 p.p. of ROTE;
Repsol and FIG stakes >10% are relatively less productive, each generating 40bp ROTE.
Table 3: CABK RoTE erosion
Company Stake
Carrying
value Goodwill
Gain/lo
ss AC
Div
2015
Profits
2015 Yield ROAC
CABK RoTE
2015
Delta CABK RoTE
from sale
Repsol 11.9% 3,367 0 (663) 1,280
174
14% 6.8% 0.4%
Telefonica 5.3% 3,213 0 - 559 173
5.4% 31% 6.6% 0.7%
Industrial companies
6,580 - (663) 1,839
347
19% 6.1% 1.1%
FIG stakes >10%
3,042 634 (692) 2,536
225
9% 7.0% 0.2%
FIG stakes <10%
1,738 299 587 -54
186
n.s. 6.3% 0.9%
Total FIG. Stakes
4,780 933 (106) 2,482
412
17% 6.0% 1.3%
Tot. Stakes
11,360 933 (769) 4,322
759
18% 4.5% 2.7%
CABK
7.2%
CABK ex stakes
4.5%
Source: Mediobanca Securities, BBG consensus, company data
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Industrial stakes consume €1.8bn capital and generate €347m profits (and dividends), for
19% 2015E ROAC;
FIG stakes >10% consume €2.5bn capital and generate €225m profits, for 9% ROAC;
FIG stakes <10% consume -€52m capital on account of €587m MTM gains more than
compensating for the €299m goodwill and the €234m capital absorption from RWAs. This
makes the €186m profit consolidation essentially an infinite ROAC.
Our analysis concludes that the full sale of stakes would lose CABK €0.7bn profits (€0.8bn dividends
and profits minus the €4.3bn capital free up invested on Spanish 3 year bonds at 0.45%), or 50% of
2015E profits for a loss of 2.6 p.p. of RoTE. This would take CABK’s 2015E ROTE from our current
7.2% estimate to 4.5%.
Telefonica the largest single ROTE contributor
Looking at the specific components of the portfolio (see Chart 4) we note that out of the 2.7 p.p.
2015E RoTE loss:
Telefonica is the single stake with the highest ROTE contribution at 0.7%;
FIG stakes <10% (EBS, GF Inbursa) jointly contribute 1.2 p.p. of ROTE;
Repsol and FIG stakes >10% are relatively less productive, each generating 40bp ROTE.
Table 3: CABK RoTE erosion
Company Stake
Carrying
value Goodwill
Gain/lo
ss AC
Div
2015
Profits
2015 Yield ROAC
CABK RoTE
2015
Delta CABK RoTE
from sale
Repsol 11.9% 3,367 0 (663) 1,280
174
14% 6.8% 0.4%
Telefonica 5.3% 3,213 0 - 559 173
5.4% 31% 6.6% 0.7%
Industrial companies
6,580 - (663) 1,839
347
19% 6.1% 1.1%
FIG stakes >10%
3,042 634 (692) 2,536
225
9% 7.0% 0.2%
FIG stakes <10%
1,738 299 587 -54
186
n.s. 6.3% 0.9%
Total FIG. Stakes
4,780 933 (106) 2,482
412
17% 6.0% 1.3%
Tot. Stakes
11,360 933 (769) 4,322
759
18% 4.5% 2.7%
CABK
7.2%
CABK ex stakes
4.5%
Source: Mediobanca Securities, BBG consensus, company data
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Bank of East Asia is the first candidate for a disposal...
Chart 5 maps the trade-off from stake sales on the CABK CET1 FL ratio and the 2015E ROTE. FIG
stakes >10% show a minimal negative impact to group ROTE with the highest positive re-rating of
CET1, suggesting this is where management should 1
st
look to make sales, in our view (Bank of East
Asia above all, given the recent move to take control of BPI).
Repsol takes second place in the disposal priority list, in our view. The negligible impact to core
capital comes with c.40bp erosion to ROTE.
Telefonica and FIG stakes <10%, despite the low strategic rationale, are the ones whose sale would
imply the largest ROTE hits, but would also provide material CET1 boost.
...generating alone 81bps CET1 boost
Chart 4: CABK 2015E ROTE waterfall for stakes disposals
Source: Mediobanca Securities, BBG consensus, company data
Chart 5: CABK CET1 and RoTE impact from stake disposals
Source: Mediobanca Securities, BBG consensus, company data
7.2%
4.5%
0.4%
0.7%
0.4%
1.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2015E CABK RoTE Repsol TelefonicaFIG stakes >10%FIG stakes <10%2015E ROTE ex
stakes
Repsol
Telefonica
FIG stakes >10%
FIG stakes <10%
-1.00%
-0.90%
-0.80%
-0.70%
-0.60%
-0.50%
-0.40%
-0.30%
-0.20%
-0.10%
0.00%
-0.10%0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%
2015E ROTE delta
2014 FL CET1 delta
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Bank of East Asia is the first candidate for a disposal...
Chart 5 maps the trade-off from stake sales on the CABK CET1 FL ratio and the 2015E ROTE. FIG
stakes >10% show a minimal negative impact to group ROTE with the highest positive re-rating of
CET1, suggesting this is where management should 1
st
look to make sales, in our view (Bank of East
Asia above all, given the recent move to take control of BPI).
Repsol takes second place in the disposal priority list, in our view. The negligible impact to core
capital comes with c.40bp erosion to ROTE.
Telefonica and FIG stakes <10%, despite the low strategic rationale, are the ones whose sale would
imply the largest ROTE hits, but would also provide material CET1 boost.
...generating alone 81bps CET1 boost
Chart 4: CABK 2015E ROTE waterfall for stakes disposals
Source: Mediobanca Securities, BBG consensus, company data
Chart 5: CABK CET1 and RoTE impact from stake disposals
Source: Mediobanca Securities, BBG consensus, company data
7.2%
4.5%
0.4%
0.7%
0.4%
1.2%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
2015E CABK RoTE Repsol TelefonicaFIG stakes >10%FIG stakes <10%2015E ROTE ex
stakes
Repsol
Telefonica
FIG stakes >10%
FIG stakes <10%
-1.00%
-0.90%
-0.80%
-0.70%
-0.60%
-0.50%
-0.40%
-0.30%
-0.20%
-0.10%
0.00%
-0.10%0.00%0.10%0.20%0.30%0.40%0.50%0.60%0.70%0.80%0.90%
2015E ROTE delta
2014 FL CET1 delta
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Table 4 estimates the CET1 impact from the individual sale of the BEA stake. We calculate this
operation would relieve CABK from capital deductions as the BV of FIG stakes >10% would not
exceed 10% of the bank’s capital. As a result, we estimate the sale would generate 81bp CET1
boost.
Table 4: Bank of East Asia stake disposal to CABK CET1 FL ratio
Status quo BEA sale
10% CET1 threashold 1,687 1,687
TE of FIG stakes > 10% 2,408 1,051
RWA from FIG stakes >10% 4,218 2,628
Deductions from FIG stakes >10% 721 -
Gains/losses
(316)
Goodwill 568 568
CABK RWAs 145,019 143,429
CET1 16,871 17,844
CET1 ratio 11.63% 12.44%
Source: Mediobanca Securities, company data
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Table 4 estimates the CET1 impact from the individual sale of the BEA stake. We calculate this
operation would relieve CABK from capital deductions as the BV of FIG stakes >10% would not
exceed 10% of the bank’s capital. As a result, we estimate the sale would generate 81bp CET1
boost.
Table 4: Bank of East Asia stake disposal to CABK CET1 FL ratio
Status quo BEA sale
10% CET1 threashold 1,687 1,687
TE of FIG stakes > 10% 2,408 1,051
RWA from FIG stakes >10% 4,218 2,628
Deductions from FIG stakes >10% 721 -
Gains/losses
(316)
Goodwill 568 568
CABK RWAs 145,019 143,429
CET1 16,871 17,844
CET1 ratio 11.63% 12.44%
Source: Mediobanca Securities, company data
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Stake sales + mitigation vs regulation threat and M&A
In this chapter we weigh opportunities and threats for CABK’s capital ratio. After
dealing with asset quality in 2014 with the Comprehensive Assessment, we envisage
2015 will be for the ECB the year of regulatory harmonisation. We see little risk for
CABK on credit risk but the potential lifting of the Danish Compromise on insurance
holdings, risk weights on govies and the repercussions on DTA/DTC could erode CET1
by 350bp including acquisitions. Of these, stake sales, the listing of BPI minorities and
mitigation on insurance could offset 280bp, maintaining the adjusted 2014 FL CET1
ratio at 11.5%. This suggests when management is targeting 11% post BPI, they have
already taken into account a combination of capital management actions. We
conclude that CABK has room to manage the capital ratio but also that the potential
gearing factors are material and that capital excess considerations on CABK should be
put in this context.
2015 is the year of regulatory harmonisation for the Banking Union
We are convinced that 2015 is the year of regulatory harmonisation in the Banking Union. This
means that the Common Regulator will have to progressively harmonise capital arbitrage across
jurisdictions and banks. The main topics on the table regard:
Credit risk weights - A-IRB risk weights where internal models assess materially different
risks for the same product or counterpart, implying intrinsically asymmetric risk profiles of
banks which are hard to assess by the market (and by regulators);
Market risk, operational risk, litigation risk – the crisis taught us that banks
underestimated these risks and regulators will likely increase risk weights or demand
buffers to cushion risks coming from such factors;
Government bond risk weights – the crisis showed that government bonds are not risk
free. This is a very delicate topic particularly within the Eurozone where introducing risk
weights on govies could refuel the issue that there is no buyer of last resort;
DTA/DTC treatment into CET1 – peripheral EU countries provided a government guarantee
on a large portion of DTAs to allow their computation into CET1 ratio. If risk weights of
govies are introduced, it is likely that this could trigger a limitation or a discount of such
items into regulatory ratios.
Credit risk weight harmonization is not a threat...
Chart 6 shows the comparison of RWA/Assets and of RWA/Loans for EU banks. CABK stands at 41%
and 74%, respectively, compared with 35% and 84% at aggregate sector level and 39% and 74% for
retail banks. This suggests CABK’s RWA density is in-line with other retail banks and above the
sector, so that a potential harmonisation should not pose a serious threat to capital ratios.
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Stake sales + mitigation vs regulation threat and M&A
In this chapter we weigh opportunities and threats for CABK’s capital ratio. After
dealing with asset quality in 2014 with the Comprehensive Assessment, we envisage
2015 will be for the ECB the year of regulatory harmonisation. We see little risk for
CABK on credit risk but the potential lifting of the Danish Compromise on insurance
holdings, risk weights on govies and the repercussions on DTA/DTC could erode CET1
by 350bp including acquisitions. Of these, stake sales, the listing of BPI minorities and
mitigation on insurance could offset 280bp, maintaining the adjusted 2014 FL CET1
ratio at 11.5%. This suggests when management is targeting 11% post BPI, they have
already taken into account a combination of capital management actions. We
conclude that CABK has room to manage the capital ratio but also that the potential
gearing factors are material and that capital excess considerations on CABK should be
put in this context.
2015 is the year of regulatory harmonisation for the Banking Union
We are convinced that 2015 is the year of regulatory harmonisation in the Banking Union. This
means that the Common Regulator will have to progressively harmonise capital arbitrage across
jurisdictions and banks. The main topics on the table regard:
Credit risk weights - A-IRB risk weights where internal models assess materially different
risks for the same product or counterpart, implying intrinsically asymmetric risk profiles of
banks which are hard to assess by the market (and by regulators);
Market risk, operational risk, litigation risk – the crisis taught us that banks
underestimated these risks and regulators will likely increase risk weights or demand
buffers to cushion risks coming from such factors;
Government bond risk weights – the crisis showed that government bonds are not risk
free. This is a very delicate topic particularly within the Eurozone where introducing risk
weights on govies could refuel the issue that there is no buyer of last resort;
DTA/DTC treatment into CET1 – peripheral EU countries provided a government guarantee
on a large portion of DTAs to allow their computation into CET1 ratio. If risk weights of
govies are introduced, it is likely that this could trigger a limitation or a discount of such
items into regulatory ratios.
Credit risk weight harmonization is not a threat...
Chart 6 shows the comparison of RWA/Assets and of RWA/Loans for EU banks. CABK stands at 41%
and 74%, respectively, compared with 35% and 84% at aggregate sector level and 39% and 74% for
retail banks. This suggests CABK’s RWA density is in-line with other retail banks and above the
sector, so that a potential harmonisation should not pose a serious threat to capital ratios.
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02 March 2015 ◆ 13
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...but Danish Compromise could be waived...
CABK controls 100% of VidaCaixa, one of Spain’s largest insurance companies with c.€36bn technical
reserves. In 2013 the vehicle carried €3.5bn tangible equity, after €1bn goodwill deduction. This
provided for a 10% ratio between tangible equity and technical reserves. Under Basel III, the
treatment of the equity from controlling stakes in insurance companies is part of the 10% and 15%
buffers of FIG stakes and DTA. Any excess is a deduction from capital ratios. The introduction of the
Danish Compromise allowed to account for such exposures through a penalising 370% risk weight.
The ECB’s harmonisation of capital rules could potentially lift the adoption of the Danish
Compromise, for a potential large hit to CABK’s CET1 ratio. In 2014, CABK geared up VidaCaixa by
paying out over €2bn equity to the parent company, hence reducing the potential risk to group
CET1 ratio. On the Q414 call management disclosed the lifting of the Danish Compromise would
account for c.90bp CET1 erosion but could be reduced to less than 50bp from further mitigating
actions. Table 5 shows the estimated evolution of VidaCaixa’s equity and the 2014 adj. equity to
reduce capital deductions. We envisage up to €1bn further gearing at VidaCaixa through the payout
of further relevering of the balance sheet. This would take TE/technical reserves at 2.9%. This
move matches what Credit Agricole (CA) is doing on its huge insurance operations. The current
€11bn equity supporting the €220bn technical reserves could be reduced to €6bn according to the
company, taking the ratio between the two items to 2.7%, in line with CABK’s potential target.
Chart 6: comparison of RWA/assets and RWA/loans, 2014
Source: Mediobanca Securities
Table 5: VidaCaixa vs CredAg capital requirements 2013, 2014, adjusted for Basel III FL
I l s e
2013 2014 adj. CA 2014 CA adj
Capital 1.3 1.3 1.3
Share premium, reserves and retained earnings 3.2 1.7 0.7
Goodwill 1.0 1.0 1.0
TE 3.5 2.0 1.0 11 6
Technical reserves 35 36 36 220 220
Equity/reserves 10.1% 5.6% 2.9% 5.0% 2.7%
Source: Mediobanca Securities, company data
41%
35%
39%
74%
84%
74%
0%
20%
40%
60%
80%
100%
120%
140%
ALPHA
PMI PIR BPE RBI
BBVA
Eurobank
SAB NBG
EBS
STAN
POP
UBI
UCG BKT
HSBC
DNB
ISP
SAN MPS
BP
CABK
CBK KBC RBS SEB
BKIA NDA BAR
CS
LLOY
ING BNP GLE
KN
DANSKE
DBK
SWEDA
UBS
CASA
SHB
Banks
Retail banks
WB banks
RWAs/ASSETS RWA/LOANS
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...but Danish Compromise could be waived...
CABK controls 100% of VidaCaixa, one of Spain’s largest insurance companies with c.€36bn technical
reserves. In 2013 the vehicle carried €3.5bn tangible equity, after €1bn goodwill deduction. This
provided for a 10% ratio between tangible equity and technical reserves. Under Basel III, the
treatment of the equity from controlling stakes in insurance companies is part of the 10% and 15%
buffers of FIG stakes and DTA. Any excess is a deduction from capital ratios. The introduction of the
Danish Compromise allowed to account for such exposures through a penalising 370% risk weight.
The ECB’s harmonisation of capital rules could potentially lift the adoption of the Danish
Compromise, for a potential large hit to CABK’s CET1 ratio. In 2014, CABK geared up VidaCaixa by
paying out over €2bn equity to the parent company, hence reducing the potential risk to group
CET1 ratio. On the Q414 call management disclosed the lifting of the Danish Compromise would
account for c.90bp CET1 erosion but could be reduced to less than 50bp from further mitigating
actions. Table 5 shows the estimated evolution of VidaCaixa’s equity and the 2014 adj. equity to
reduce capital deductions. We envisage up to €1bn further gearing at VidaCaixa through the payout
of further relevering of the balance sheet. This would take TE/technical reserves at 2.9%. This
move matches what Credit Agricole (CA) is doing on its huge insurance operations. The current
€11bn equity supporting the €220bn technical reserves could be reduced to €6bn according to the
company, taking the ratio between the two items to 2.7%, in line with CABK’s potential target.
Chart 6: comparison of RWA/assets and RWA/loans, 2014
Source: Mediobanca Securities
Table 5: VidaCaixa vs CredAg capital requirements 2013, 2014, adjusted for Basel III FL
I l s e
2013 2014 adj. CA 2014 CA adj
Capital 1.3 1.3 1.3
Share premium, reserves and retained earnings 3.2 1.7 0.7
Goodwill 1.0 1.0 1.0
TE 3.5 2.0 1.0 11 6
Technical reserves 35 36 36 220 220
Equity/reserves 10.1% 5.6% 2.9% 5.0% 2.7%
Source: Mediobanca Securities, company data
41%
35%
39%
74%
84%
74%
0%
20%
40%
60%
80%
100%
120%
140%
ALPHA
PMI PIR BPE RBI
BBVA
Eurobank
SAB NBG
EBS
STAN
POP
UBI
UCG BKT
HSBC
DNB
ISP
SAN MPS
BP
CABK
CBK KBC RBS SEB
BKIA NDA BAR
CS
LLOY
ING BNP GLE
KN
DANSKE
DBK
SWEDA
UBS
CASA
SHB
Banks
Retail banks
WB banks
RWAs/ASSETS RWA/LOANS
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...risk weights on EU govies is likely to be introduced...
Table 6 shows the evolution of CABK’s ALCO portfolio. As of Q414 this was essentially constituted of
€37bn, 80% from Spanish govies, 20% from other securities. Despite the drop in sovereign spreads,
the yield of the portfolio has maintained stable at a staggering 3.4% through the increase in
duration from 2.1 to 3.1 years. Interestingly, the incidence of Spanish govies on total assets has
reverted to 8% in Q414, back to the Dec-13 level and down from a peak of 10% in Jun-14 and Sep-
14. We believe this is the consequence of the compression of sovereign yields. Yet, the likely action
on risk weights on govies from the ongoing ECB work on RWA harmonisation should imply a
continuation in the diversification of the portfolio, in our view. For the sake of our simulation of
sensitivity of capital ratios, we conservatively assume 10% risk weight.
...likely combined with DTA/DTC restrictions
CABK carries €4.6bn government guaranteed DTAs. This represents 27% of CABK’s FL CET1 capital
and 3.2 p.p. of CET1 ratio. We believe that the recognition of state-guaranteed DTAs into CET1 goes
hand in hand with the introduction of risk weights on govies as these types of DTAs represent
implicitly the same risk. For the sake of our simulation of sensitivity of capital ratios, we assume a
10% haircut to DTA recognition into CET1 capital.
Capital is not an excess resource
Table 8 shows the summary of our CABK capital sensitivity where we include impacts from
acquisitions, foreseeable regulatory changes, equity stakes sale and mitigating actions. We include:
Acquisitions: Barclays Spain (100%) and BPI (assuming 100% takeout and 25% minority
listing);
Sales: the complete sale of industrial stakes;
Table 6: CABK breakdown of AFS bond portfolio
Govies ES govies Other Yield Duration
govies as %
of assets
Dec-13 27.1 13.5 3.30% 2.1 8%
Mar-14 29.0 12.8 3.40% 2.2 9%
Jun-14 32.8 11.2 3.40% 2.6 10%
Sep-14 31.8 10.5 3.40% 2.5 10%
Dec-14 28.7 7.8 3.40% 3.1 8%
Source: Mediobanca Securities, company data
Table 7: DTA/DTC incidence in CABK’s Basel III FL ratio, 2014
2014
DTA/DTC 4,600
CET1 capital 16,871
RWAs 145,019
DTC incidence on RWA 3.2%
Source: Mediobanca Securities, company data
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...risk weights on EU govies is likely to be introduced...
Table 6 shows the evolution of CABK’s ALCO portfolio. As of Q414 this was essentially constituted of
€37bn, 80% from Spanish govies, 20% from other securities. Despite the drop in sovereign spreads,
the yield of the portfolio has maintained stable at a staggering 3.4% through the increase in
duration from 2.1 to 3.1 years. Interestingly, the incidence of Spanish govies on total assets has
reverted to 8% in Q414, back to the Dec-13 level and down from a peak of 10% in Jun-14 and Sep-
14. We believe this is the consequence of the compression of sovereign yields. Yet, the likely action
on risk weights on govies from the ongoing ECB work on RWA harmonisation should imply a
continuation in the diversification of the portfolio, in our view. For the sake of our simulation of
sensitivity of capital ratios, we conservatively assume 10% risk weight.
...likely combined with DTA/DTC restrictions
CABK carries €4.6bn government guaranteed DTAs. This represents 27% of CABK’s FL CET1 capital
and 3.2 p.p. of CET1 ratio. We believe that the recognition of state-guaranteed DTAs into CET1 goes
hand in hand with the introduction of risk weights on govies as these types of DTAs represent
implicitly the same risk. For the sake of our simulation of sensitivity of capital ratios, we assume a
10% haircut to DTA recognition into CET1 capital.
Capital is not an excess resource
Table 8 shows the summary of our CABK capital sensitivity where we include impacts from
acquisitions, foreseeable regulatory changes, equity stakes sale and mitigating actions. We include:
Acquisitions: Barclays Spain (100%) and BPI (assuming 100% takeout and 25% minority
listing);
Sales: the complete sale of industrial stakes;
Table 6: CABK breakdown of AFS bond portfolio
Govies ES govies Other Yield Duration
govies as %
of assets
Dec-13 27.1 13.5 3.30% 2.1 8%
Mar-14 29.0 12.8 3.40% 2.2 9%
Jun-14 32.8 11.2 3.40% 2.6 10%
Sep-14 31.8 10.5 3.40% 2.5 10%
Dec-14 28.7 7.8 3.40% 3.1 8%
Source: Mediobanca Securities, company data
Table 7: DTA/DTC incidence in CABK’s Basel III FL ratio, 2014
2014
DTA/DTC 4,600
CET1 capital 16,871
RWAs 145,019
DTC incidence on RWA 3.2%
Source: Mediobanca Securities, company data
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Regulatory issues and mitigations: waving of the Danish Compromise on the treatment of
the insurance business and management actions to mitigate this, the introduction of risk
weights on govies and the consequent haircut to DTAs into CET1 capital. We assume no
impact to RWA from credit risk harmonisation.
Overall we see potential for up to 3.5 p.p. gearing of CET1 ratio and 2.7 p.p. of capital free up:
Announced acquisitions potentially gear up CET1 ratio by 2.1 p.p. and could be offset by
30bp assuming 25% minority listing. Equity stakes disposal would offset this with 2 p.p.
accretion;
The change in the treatment of insurance operations could cost 90bp, half offset by
potential management actions;
Regulatory risks could account for 0.5 p.p. gearing.
Overall these factors would take CABK’s Q414 FL CET1 ratio pre-acquisitions to the adjusted level of
11.5%, essentially implying that - excluding the Barclays Spain acquisition - CABK could have enough
in-house means to fully offset balance sheet gearing items.
Yet, we conclude the recently announced acquisitions and the potential future regulatory changes
imply CABK is not an over capitalized bank.
Table 8: CET1 waterfall for acquisitions, disposals and regulatory risks
CET1 Assumptions
2014 FL CET1 (incl. BAR) 12.3%
BAR ES 0.70%
BPI 1.40% 100% takeout
Danish compromise 0.90% full deduction
RWA on govies 0.23% 10% risk weight
DTA 0.32% 10% discount
Stakes disposal 1.96%
BPI minority 0.30% 25% minority listing
VidaCaixa mitigation 0.45%
payout of share
premium
Source: Mediobanca Securities, company data
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Regulatory issues and mitigations: waving of the Danish Compromise on the treatment of
the insurance business and management actions to mitigate this, the introduction of risk
weights on govies and the consequent haircut to DTAs into CET1 capital. We assume no
impact to RWA from credit risk harmonisation.
Overall we see potential for up to 3.5 p.p. gearing of CET1 ratio and 2.7 p.p. of capital free up:
Announced acquisitions potentially gear up CET1 ratio by 2.1 p.p. and could be offset by
30bp assuming 25% minority listing. Equity stakes disposal would offset this with 2 p.p.
accretion;
The change in the treatment of insurance operations could cost 90bp, half offset by
potential management actions;
Regulatory risks could account for 0.5 p.p. gearing.
Overall these factors would take CABK’s Q414 FL CET1 ratio pre-acquisitions to the adjusted level of
11.5%, essentially implying that - excluding the Barclays Spain acquisition - CABK could have enough
in-house means to fully offset balance sheet gearing items.
Yet, we conclude the recently announced acquisitions and the potential future regulatory changes
imply CABK is not an over capitalized bank.
Table 8: CET1 waterfall for acquisitions, disposals and regulatory risks
CET1 Assumptions
2014 FL CET1 (incl. BAR) 12.3%
BAR ES 0.70%
BPI 1.40% 100% takeout
Danish compromise 0.90% full deduction
RWA on govies 0.23% 10% risk weight
DTA 0.32% 10% discount
Stakes disposal 1.96%
BPI minority 0.30% 25% minority listing
VidaCaixa mitigation 0.45%
payout of share
premium
Source: Mediobanca Securities, company data
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Chart 7: comparison of RWA/assets and RWA/loans, 2014
Source: Mediobanca Securities, company data
12.3%
11.5%
0.7%
1.40%
0.9%
0.2%
0.3%
2.0%
0.3%
0.5%
0%
2%
4%
6%
8%
10%
12%
14%
2014 FL
CET1
BAR
ES
BPI Danish
compromise
RWA on
govies
DTA Stake
disposals
BPI minorityVidaCaixa
mitigation
2014 FL
CET1 adj
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Chart 7: comparison of RWA/assets and RWA/loans, 2014
Source: Mediobanca Securities, company data
12.3%
11.5%
0.7%
1.40%
0.9%
0.2%
0.3%
2.0%
0.3%
0.5%
0%
2%
4%
6%
8%
10%
12%
14%
2014 FL
CET1
BAR
ES
BPI Danish
compromise
RWA on
govies
DTA Stake
disposals
BPI minorityVidaCaixa
mitigation
2014 FL
CET1 adj
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02 March 2015 ◆ 17
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Building the second home market
CABK made a VTO for BPI to gain full control of the Portuguese bank. We attach low
visibility to the €130m synergy target as these imply 25% reduction of BPI’s cost vs a
benchmark of 16% for cross-border deals. Looking at profitability, BPI emerges as a
relative underperformer in Portugal. This is particularly evident if BPI has to sell its
African businesses. Hence, we conclude that on one hand, the valuation offered to BPI
is relatively rich, but reflects the premium required to change BPI’s governance and
could be justified in case of full delivery on synergy targets. The main positive in our
view is that through this deal CABK is regaining full control over its investment case
and particularly to manage directly the potential evolutions on the Portuguese side.
We believe that BPI is only half the story and that the real deal is gaining top spot in
Portugal through BPI’s acquisition of Novo Banco. The latter is up for sale, is twice the
size of BPI, and a merger would deliver Portugal’s #1 bank with c.20-25% market
share. The deal would be transformational for CABK as well. We estimate €291m
visible after-tax synergies coming from the in-market merger and excluding cross-
border synergies announced, leading to 6% 3-yr EPS accretion at CABK following the
sale of Africa and €5.5bn rights issue - and assuming no stake disposal – to defend 11%
CET1 ratio. The deal would transform CABK’s investment case, con verting the
potential „cashback‟ story from high capital ratios, cost cutting and stake disposals
into the bank of the Iberian peninsula, i.e. a large cross-border restructuring story to
play the recovery of peripheral Europe. This would position CABK for the forthcoming
cross-border M&A we believe the Banking Union will trigger in coming years.
BPI’s tender offer is only half of the story...
Voluntary tender offer on BPI at 27% premium
On 17 February 2015, CABK launched a voluntary tender offer (VTO) on the 56% of Portugal’s BPI
CABK does not already own. The offer price of €1.329 for 814.5m shares implies a total potential
cash outflow of €1.1bn and a premium of 27% on the previous closing price. The VTO is subject to
the regulatory approvals and to two conditions imposed by CABK:
1) Reaching >50% ownership (i.e. >5.9% additional stake);
2) The removal by BPI’s AGM of the current 20% voting cap.
The second point requires a 75% qualified majority, implying BPI shareholders will have to vote in
mass in favour of the change.
BPI is Portugal’s and Angola’s #4 bank
With €43bn assets, €25bn loans, €24bn deposits and 1.7m clients, BPI is the fourth bank in the
Portugal and in Angola, where BPI controls BFA. BPI has an 8.6% Basel III FL CET1 ratio, 103%
loan/deposit ratio, 61% loan/asset ratio and 88% NPL coverage.
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Building the second home market
CABK made a VTO for BPI to gain full control of the Portuguese bank. We attach low
visibility to the €130m synergy target as these imply 25% reduction of BPI’s cost vs a
benchmark of 16% for cross-border deals. Looking at profitability, BPI emerges as a
relative underperformer in Portugal. This is particularly evident if BPI has to sell its
African businesses. Hence, we conclude that on one hand, the valuation offered to BPI
is relatively rich, but reflects the premium required to change BPI’s governance and
could be justified in case of full delivery on synergy targets. The main positive in our
view is that through this deal CABK is regaining full control over its investment case
and particularly to manage directly the potential evolutions on the Portuguese side.
We believe that BPI is only half the story and that the real deal is gaining top spot in
Portugal through BPI’s acquisition of Novo Banco. The latter is up for sale, is twice the
size of BPI, and a merger would deliver Portugal’s #1 bank with c.20-25% market
share. The deal would be transformational for CABK as well. We estimate €291m
visible after-tax synergies coming from the in-market merger and excluding cross-
border synergies announced, leading to 6% 3-yr EPS accretion at CABK following the
sale of Africa and €5.5bn rights issue - and assuming no stake disposal – to defend 11%
CET1 ratio. The deal would transform CABK’s investment case, con verting the
potential „cashback‟ story from high capital ratios, cost cutting and stake disposals
into the bank of the Iberian peninsula, i.e. a large cross-border restructuring story to
play the recovery of peripheral Europe. This would position CABK for the forthcoming
cross-border M&A we believe the Banking Union will trigger in coming years.
BPI’s tender offer is only half of the story...
Voluntary tender offer on BPI at 27% premium
On 17 February 2015, CABK launched a voluntary tender offer (VTO) on the 56% of Portugal’s BPI
CABK does not already own. The offer price of €1.329 for 814.5m shares implies a total potential
cash outflow of €1.1bn and a premium of 27% on the previous closing price. The VTO is subject to
the regulatory approvals and to two conditions imposed by CABK:
1) Reaching >50% ownership (i.e. >5.9% additional stake);
2) The removal by BPI’s AGM of the current 20% voting cap.
The second point requires a 75% qualified majority, implying BPI shareholders will have to vote in
mass in favour of the change.
BPI is Portugal’s and Angola’s #4 bank
With €43bn assets, €25bn loans, €24bn deposits and 1.7m clients, BPI is the fourth bank in the
Portugal and in Angola, where BPI controls BFA. BPI has an 8.6% Basel III FL CET1 ratio, 103%
loan/deposit ratio, 61% loan/asset ratio and 88% NPL coverage.
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Angola is subsidizing Portugal losses
Table 10 shows the geographical contribution to the BPI group. Portugal accounts for c.80% of costs,
93% of loans, c.80% of assets and 74% of deposits. Yet, Angola returned €126m profits in 2014 vs
€288m losses in Portugal (€28m losses in 2013).
€130m synergies target
CABK is targeting €130m synergies from BPI from ‘sharing of best practices to enable significant
improvements in profitability over time’. This should take BPI’s C/I from the current 85% to 50% by
2017.
Negatives: low visibility on cross border synergies...
CABK’s €130m targeted synergies represent 25% of BPI’s Portuguese costs. This compares with a 10-
year average cost synergies at 16% of the target’s cost base in cross border deals (see Table 11).
Given CABK’s long lasting investment into BPI, we would expect potential cross border synergies
should have been already partly realized. Hence, we see as a the €130m synergies target suffering
from low visibility.
Table 9: BPI 2014 metrics
2014
Assets 41,287
Loans 25,191
Deposits 24,380
RWAs 20,208
NPL 1,219
CET1 ratio FL 8.6%
L/D 103%
Loans/assets 61%
NPL coverage 88%
Source: Mediobanca Securities, company data
Table 10: Portugal share of BPI group
BPI Portugal Angola
Portugal % of
group
Costs -672 -530 -142 79%
Profits -162 -288 126 178%
Loans 25,269 23,436 1,833 93%
Assets 42,633 34,851 8,452 82%
Deposits 28,135 20,686 7,449 74%
Source: Mediobanca Securities, company data
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Caixa Bank
02 March 2015 ◆ 18
Price: € 4.11 Target price: € 4.40 Neutral
Angola is subsidizing Portugal losses
Table 10 shows the geographical contribution to the BPI group. Portugal accounts for c.80% of costs,
93% of loans, c.80% of assets and 74% of deposits. Yet, Angola returned €126m profits in 2014 vs
€288m losses in Portugal (€28m losses in 2013).
€130m synergies target
CABK is targeting €130m synergies from BPI from ‘sharing of best practices to enable significant
improvements in profitability over time’. This should take BPI’s C/I from the current 85% to 50% by
2017.
Negatives: low visibility on cross border synergies...
CABK’s €130m targeted synergies represent 25% of BPI’s Portuguese costs. This compares with a 10-
year average cost synergies at 16% of the target’s cost base in cross border deals (see Table 11).
Given CABK’s long lasting investment into BPI, we would expect potential cross border synergies
should have been already partly realized. Hence, we see as a the €130m synergies target suffering
from low visibility.
Table 9: BPI 2014 metrics
2014
Assets 41,287
Loans 25,191
Deposits 24,380
RWAs 20,208
NPL 1,219
CET1 ratio FL 8.6%
L/D 103%
Loans/assets 61%
NPL coverage 88%
Source: Mediobanca Securities, company data
Table 10: Portugal share of BPI group
BPI Portugal Angola
Portugal % of
group
Costs -672 -530 -142 79%
Profits -162 -288 126 178%
Loans 25,269 23,436 1,833 93%
Assets 42,633 34,851 8,452 82%
Deposits 28,135 20,686 7,449 74%
Source: Mediobanca Securities, company data
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02 March 2015 ◆ 19
Price: € 4.11 Target price: € 4.40 Neutral
Table 11: summary revenue and cost synergies, May-04 to Sept-14
Date Revenue Costs
RBS/Charter One May-04 12% 24%
Santander/Abbey Nov-04 5% 17%
Danske/Irish NAB Dec-04 0% 19%
ABN AMRO/Antonveneta Mar-05 5% 15%
UCG/HVB Jul-05 1% 15%
Commerzbank/Eurohypo Oct-05 5% 15%
BNP/BNL Feb-06 7% 14%
Natixis Mar-06 9% 9%
BCP/BPI Apr-06 0% 40%
BIN-SPI Aug-06 3% 19%
BIN-SPI (realised) Aug-06 3% 27%
BPVN-BPI Oct-06 17% 22%
Credit Agricole / Cariparma Oct-06 5% 9%
Danske/Sampo Bank Nov-06 0% 18%
BPU/ BL Nov-06 0% 21%
UCG/CAP May-07 6% 24%
RBS/ABN Amro Jul-07 2% 8%
MPS/Antonveneta Nov-07 6% 25%
ISP/Carifirenze Jun-08 9% 29%
DBK/DPB Sep-08 6% 25%
Lloyds/HBOS Sep-08 0% 15%
BNP/Fortis Oct-08 3% 20%
Bankia May-11 0% 17%
POP/Pastor Oct-11 0% 40%
SAB/CAM Dec-11 4% 32%
BBVA/Unnim Mar-12 3% 40%
CABK/BdV Nov-12 0% 38%
SAN/Banesto Dec-12 4% 51%
BBVA/CX Jul-14 0% 40%
POP/Citi Jun-14 0% 20%
CABK/BARC Sep-14 0% 42%
Average (Mean) 4% 24%
Average in-market (Mean) 4% 31%
Average in Spain (Mean) 1% 36%
Average cross border (Mean) 4% 16%
Source: Mediobanca Securities, company data
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Table 11: summary revenue and cost synergies, May-04 to Sept-14
Date Revenue Costs
RBS/Charter One May-04 12% 24%
Santander/Abbey Nov-04 5% 17%
Danske/Irish NAB Dec-04 0% 19%
ABN AMRO/Antonveneta Mar-05 5% 15%
UCG/HVB Jul-05 1% 15%
Commerzbank/Eurohypo Oct-05 5% 15%
BNP/BNL Feb-06 7% 14%
Natixis Mar-06 9% 9%
BCP/BPI Apr-06 0% 40%
BIN-SPI Aug-06 3% 19%
BIN-SPI (realised) Aug-06 3% 27%
BPVN-BPI Oct-06 17% 22%
Credit Agricole / Cariparma Oct-06 5% 9%
Danske/Sampo Bank Nov-06 0% 18%
BPU/ BL Nov-06 0% 21%
UCG/CAP May-07 6% 24%
RBS/ABN Amro Jul-07 2% 8%
MPS/Antonveneta Nov-07 6% 25%
ISP/Carifirenze Jun-08 9% 29%
DBK/DPB Sep-08 6% 25%
Lloyds/HBOS Sep-08 0% 15%
BNP/Fortis Oct-08 3% 20%
Bankia May-11 0% 17%
POP/Pastor Oct-11 0% 40%
SAB/CAM Dec-11 4% 32%
BBVA/Unnim Mar-12 3% 40%
CABK/BdV Nov-12 0% 38%
SAN/Banesto Dec-12 4% 51%
BBVA/CX Jul-14 0% 40%
POP/Citi Jun-14 0% 20%
CABK/BARC Sep-14 0% 42%
Average (Mean) 4% 24%
Average in-market (Mean) 4% 31%
Average in Spain (Mean) 1% 36%
Average cross border (Mean) 4% 16%
Source: Mediobanca Securities, company data
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Caixa Bank
02 March 2015 ◆ 20
Price: € 4.11 Target price: € 4.40 Neutral
...and valuation looks rich vs profitability, reflecting premium to change governance
Table 12 shows the comparison between the valuation of BPI and of BCP, according to Bloomberg.
This shows BPI trading on 0.9x TE post CABK’s voluntary offer, a double digit discount vs BCP’s 1.1x.
Table 13 compares the profitability of BPI to the one of BCP and Santander Totta, the main
domestic competitors in 2014-17E. 2014E has been a loss making year for BPI and BCP and is
therefore of little help to assess BPI’s relative profitability. Looking forward, we construct
perspective profitability by:
taking BBG consensus estimates for BPI and BCP and our estimates for Santander Totta;
we grow BPI African businesses’ 2014 reported profits at the 6.6% average growth of the
last six years to estimate the Portuguese profitability.
The indication from this analysis is that BPI suffers from a structurally lower than peer profitability
of c.2-3 p.p. of RoTE. This, despite a relatively stretched CET1 FL ratio of 8.6%.
We believe such relatively high valuation embedded in CABK’s VTO reflects the premium required
to remunerate shareholders for the removal of the 20% voting cap, which requires a vast majority
support at the AGM.
CABK consideration for BPI highly relies on delivery on synergies
Table 14 shows the sensitivity of BPI’s valuation to the sale of the African businesses and to the
synergies targeted by CABK. On the former, we apply a conservative 10x PE multiple to African
earnings. This implies a valuation of €1.3bn for Angola and Mozambique, generating a capital gain
of €0.8bn. This should imply a P/TE valuation of 2.8x, which reflects the 28% RoTE of 2014.
Table 12: BPI valuation multiples vs BCP
BPI BCP
BV 2,129 4,987
Intangibles 25 1,198
TE 2,104 3,789
Market cap 1,847 4,320
P/TE 0.9 1.1
Source: Mediobanca Securities, BBG, company data
Table 13: BPI profitability benchmarking
2014 2015 2016 2017
BPI RoTE -7.7% 7.0% 8.3% 8.5%
BPI ex Africa
1.3% 3.0% 3.2%
BPI ex Africa incl. CABK synergies 1.3% 6.4% 7.3%
BCP RoTE -3.5% 7.6% 12.0% 12.2%
SAN TOTTA RoTE 12.0% 11.3% 10.2% 10.1%
Avg RoTE competitors
9.5% 11.1% 11.1%
Source: Mediobanca Securities, BBG, company data
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Caixa Bank
02 March 2015 ◆ 20
Price: € 4.11 Target price: € 4.40 Neutral
...and valuation looks rich vs profitability, reflecting premium to change governance
Table 12 shows the comparison between the valuation of BPI and of BCP, according to Bloomberg.
This shows BPI trading on 0.9x TE post CABK’s voluntary offer, a double digit discount vs BCP’s 1.1x.
Table 13 compares the profitability of BPI to the one of BCP and Santander Totta, the main
domestic competitors in 2014-17E. 2014E has been a loss making year for BPI and BCP and is
therefore of little help to assess BPI’s relative profitability. Looking forward, we construct
perspective profitability by:
taking BBG consensus estimates for BPI and BCP and our estimates for Santander Totta;
we grow BPI African businesses’ 2014 reported profits at the 6.6% average growth of the
last six years to estimate the Portuguese profitability.
The indication from this analysis is that BPI suffers from a structurally lower than peer profitability
of c.2-3 p.p. of RoTE. This, despite a relatively stretched CET1 FL ratio of 8.6%.
We believe such relatively high valuation embedded in CABK’s VTO reflects the premium required
to remunerate shareholders for the removal of the 20% voting cap, which requires a vast majority
support at the AGM.
CABK consideration for BPI highly relies on delivery on synergies
Table 14 shows the sensitivity of BPI’s valuation to the sale of the African businesses and to the
synergies targeted by CABK. On the former, we apply a conservative 10x PE multiple to African
earnings. This implies a valuation of €1.3bn for Angola and Mozambique, generating a capital gain
of €0.8bn. This should imply a P/TE valuation of 2.8x, which reflects the 28% RoTE of 2014.
Table 12: BPI valuation multiples vs BCP
BPI BCP
BV 2,129 4,987
Intangibles 25 1,198
TE 2,104 3,789
Market cap 1,847 4,320
P/TE 0.9 1.1
Source: Mediobanca Securities, BBG, company data
Table 13: BPI profitability benchmarking
2014 2015 2016 2017
BPI RoTE -7.7% 7.0% 8.3% 8.5%
BPI ex Africa
1.3% 3.0% 3.2%
BPI ex Africa incl. CABK synergies 1.3% 6.4% 7.3%
BCP RoTE -3.5% 7.6% 12.0% 12.2%
SAN TOTTA RoTE 12.0% 11.3% 10.2% 10.1%
Avg RoTE competitors
9.5% 11.1% 11.1%
Source: Mediobanca Securities, BBG, company data
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Caixa Bank
02 March 2015 ◆ 21
Price: € 4.11 Target price: € 4.40 Neutral
Adjusting the consideration paid by CABK for BPI for the potential sale of the African businesses
retrieves a P/TE of 0.6x for the equivalent 2017E RoTE of 3.2%, which would reflect a dear
valuation for a business. Assuming 100% delivery on targeted synergies by 2017E would lift RoTE by
4p.p. to 7.3%, making the 0.6x P/TE valuation an attractive one, in our view.
We conclude that the 0.9x optical valuation for BPI offered by CABK heavily relies on the delivery
on targeted synergies.
Positives: taking control of a large part of CABK’s investment case
We believe the main positive of the CABK VTO on BPI is that with the move CABK is looking at
regaining full control of its own destiny/investment case. In fact, in the context of the upcoming
auction of Novo Banco (former Banco Espirito Santo), CABK was running the risk of having BPI – one
of its main investments – potentially making an offer for the acquisition of Novo Banco with CABK
exposed to a transformation of its investment case without full control on it.
The 20% voting cap of BPI is to blame for this anomaly. In fact, despite CABK’s 44% stake, the voting
cap implies CABK has equal status in the BoD to Santoro (Angolan investors) which own only 18.6%,
leaving Allianz – third shareholder with 8.4% - and BPI management as potentially able to tilt key
decisions.
Hence, CABK’s move on BPI is a way to take the bull by the horns and make a definitive decision on
its Portuguese position, i.e. if the VTO will be successful, BPI will become core business and
Portugal will be CABK’s second home market; if not, we envisage CABK’s and BPI’s destinies will
move apart.
Table 14: BPI valuation excl. African businesses
BCI BFA BPI Africa BPI
Stake 30.0% 50.1%
Profits 11 117 127
P/E valuation 10 10
Price 105 1,169 1,274
Carrying value 55 418 473
RWA
8,124
Gain 50 751 801
BV
456
P/BV implied for BPI Africa
2.8
Consideration paid
1,847
P/TE
0.9
Excl. Africa
0.6
2017E RoTE ex-Africa
3.2%
2017E RoTE ex-Africa incl. synergies
7.3%
GG G G
Source: Mediobanca Securities, company data, BBG
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02 March 2015 ◆ 21
Price: € 4.11 Target price: € 4.40 Neutral
Adjusting the consideration paid by CABK for BPI for the potential sale of the African businesses
retrieves a P/TE of 0.6x for the equivalent 2017E RoTE of 3.2%, which would reflect a dear
valuation for a business. Assuming 100% delivery on targeted synergies by 2017E would lift RoTE by
4p.p. to 7.3%, making the 0.6x P/TE valuation an attractive one, in our view.
We conclude that the 0.9x optical valuation for BPI offered by CABK heavily relies on the delivery
on targeted synergies.
Positives: taking control of a large part of CABK’s investment case
We believe the main positive of the CABK VTO on BPI is that with the move CABK is looking at
regaining full control of its own destiny/investment case. In fact, in the context of the upcoming
auction of Novo Banco (former Banco Espirito Santo), CABK was running the risk of having BPI – one
of its main investments – potentially making an offer for the acquisition of Novo Banco with CABK
exposed to a transformation of its investment case without full control on it.
The 20% voting cap of BPI is to blame for this anomaly. In fact, despite CABK’s 44% stake, the voting
cap implies CABK has equal status in the BoD to Santoro (Angolan investors) which own only 18.6%,
leaving Allianz – third shareholder with 8.4% - and BPI management as potentially able to tilt key
decisions.
Hence, CABK’s move on BPI is a way to take the bull by the horns and make a definitive decision on
its Portuguese position, i.e. if the VTO will be successful, BPI will become core business and
Portugal will be CABK’s second home market; if not, we envisage CABK’s and BPI’s destinies will
move apart.
Table 14: BPI valuation excl. African businesses
BCI BFA BPI Africa BPI
Stake 30.0% 50.1%
Profits 11 117 127
P/E valuation 10 10
Price 105 1,169 1,274
Carrying value 55 418 473
RWA
8,124
Gain 50 751 801
BV
456
P/BV implied for BPI Africa
2.8
Consideration paid
1,847
P/TE
0.9
Excl. Africa
0.6
2017E RoTE ex-Africa
3.2%
2017E RoTE ex-Africa incl. synergies
7.3%
GG G G
Source: Mediobanca Securities, company data, BBG
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Caixa Bank
02 March 2015 ◆ 22
Price: € 4.11 Target price: € 4.40 Neutral
…the real deal is taking the top spot in Portugal
Novo Banco’s auction to start at the end of March
Novo Banco is a carve out from Banco Espirito Santo. The only publicly available data reflect the
balance sheet as at Dec-14 (see Table 15). The bank holds €72bn assets, €39bn loans, €27bn
deposits and €50bn RWAs. Main ratios indicate 9.2% CET1 FL ratio, 152% NPL coverage and 141%
loan/deposit. The Bank of Portugal has announced the 15 selected bidders will have to submit their
non-binding offers for Novo Banco by 20 March.
We see two potential types of bidders:
1) domestic competitors extracting cost synergies;
2) Non-European bidders buying the entry ticket to the EU.
In the former group we see larger domestic players (BPI, Santander, BCP) with higher chances given
the large expected cost synergies to be extracted.
In the latter group we see both private equity funds acquiring access to the ECB’s liquidity to fund
their investment portfolios or sovereign wealth funds (Chinese) which are aggressively growing their
peripheral EU exposure to boost portfolio diversification and exposure to Euro denominated assets
with good recovery prospects in the longer term.
BPI-Novo Banco would be a transformational deal...
Table 16 shows the total loans, assets, deposits and tangible equity of BPI and Novo Banco as at
Dec-14 against the Bank of Portugal aggregate figures for banks. The combination of the two banks
would create a bank with 20-25% market share in Portugal as the figures in the table include the
international businesses of BPI which should be stripped out.
Table 15: Novo Banco 2014
Novo Banco 2014
RWAs 49,906
CET1 FL 4,610
CET1 ratio FL 9.2%
NPL 3,462
Coverage 5,248
Coverage ratio 152%
Net assets 72,465
Loans 38,569
Deposits 27,281
Loans/assets 53%
L/D 141%
BV 5,577
Intangible 336
TE 5,241
Source: Mediobanca Securities, company data
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Caixa Bank
02 March 2015 ◆ 22
Price: € 4.11 Target price: € 4.40 Neutral
…the real deal is taking the top spot in Portugal
Novo Banco’s auction to start at the end of March
Novo Banco is a carve out from Banco Espirito Santo. The only publicly available data reflect the
balance sheet as at Dec-14 (see Table 15). The bank holds €72bn assets, €39bn loans, €27bn
deposits and €50bn RWAs. Main ratios indicate 9.2% CET1 FL ratio, 152% NPL coverage and 141%
loan/deposit. The Bank of Portugal has announced the 15 selected bidders will have to submit their
non-binding offers for Novo Banco by 20 March.
We see two potential types of bidders:
1) domestic competitors extracting cost synergies;
2) Non-European bidders buying the entry ticket to the EU.
In the former group we see larger domestic players (BPI, Santander, BCP) with higher chances given
the large expected cost synergies to be extracted.
In the latter group we see both private equity funds acquiring access to the ECB’s liquidity to fund
their investment portfolios or sovereign wealth funds (Chinese) which are aggressively growing their
peripheral EU exposure to boost portfolio diversification and exposure to Euro denominated assets
with good recovery prospects in the longer term.
BPI-Novo Banco would be a transformational deal...
Table 16 shows the total loans, assets, deposits and tangible equity of BPI and Novo Banco as at
Dec-14 against the Bank of Portugal aggregate figures for banks. The combination of the two banks
would create a bank with 20-25% market share in Portugal as the figures in the table include the
international businesses of BPI which should be stripped out.
Table 15: Novo Banco 2014
Novo Banco 2014
RWAs 49,906
CET1 FL 4,610
CET1 ratio FL 9.2%
NPL 3,462
Coverage 5,248
Coverage ratio 152%
Net assets 72,465
Loans 38,569
Deposits 27,281
Loans/assets 53%
L/D 141%
BV 5,577
Intangible 336
TE 5,241
Source: Mediobanca Securities, company data
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Caixa Bank
02 March 2015 ◆ 23
Price: € 4.11 Target price: € 4.40 Neutral
Geographically, the combination would provide 23% market share in branches at national level, with
a fairly homogeneous distribution across the different districts (see Chart 8).
Hence, the potential combination would be a transformational deal for BPI, almost trebling the size
of the Portuguese bank in the country and constituting the undisputed leader in Portuguese
banking.
...but no different from other national champions
Table 17 compares the national market share of loans and deposits for the main national champions
in Europe. The combination of BPI and Novo Banco would position between the levels of LLOY in UK
and Credit Agricole Group in France so that we see little risk of material antitrust issues from a
potential merger, in our view.
Table 17: comparison of national champions market shares, Q314
BPI
Novo
Banco
BPI/Novo
Banco ISP LLOY CA
Loans 10% 15% 24% 15% 19% 29%
Deposits 10% 11% 21% 16% 22% 31%
Source: Mediobanca Securities, company data
Table 16: BPI/Novo Banco market share, 2014E
BPI Novo Banco
BPI+Novo
Banco Portugal Mkt share
Loans 25,191 38,569 63,760 263,893 24%
Assets 41,287 72,465 113,752 449,356 25%
Deposits 24,380 27,281 51,661 250,571 21%
Capital 2,104 5,241 7,345 29,305 25%
Source: Mediobanca Securities, company data, APB
Chart 8: branch market share
Source: Mediobanca Securities, company data, APB
23%
24%24%
20%
25%25%
24%
22%
22%
9%
22%
0%
5%
10%
15%
20%
25%
30%
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Caixa Bank
02 March 2015 ◆ 23
Price: € 4.11 Target price: € 4.40 Neutral
Geographically, the combination would provide 23% market share in branches at national level, with
a fairly homogeneous distribution across the different districts (see Chart 8).
Hence, the potential combination would be a transformational deal for BPI, almost trebling the size
of the Portuguese bank in the country and constituting the undisputed leader in Portuguese
banking.
...but no different from other national champions
Table 17 compares the national market share of loans and deposits for the main national champions
in Europe. The combination of BPI and Novo Banco would position between the levels of LLOY in UK
and Credit Agricole Group in France so that we see little risk of material antitrust issues from a
potential merger, in our view.
Table 17: comparison of national champions market shares, Q314
BPI
Novo
Banco
BPI/Novo
Banco ISP LLOY CA
Loans 10% 15% 24% 15% 19% 29%
Deposits 10% 11% 21% 16% 22% 31%
Source: Mediobanca Securities, company data
Table 16: BPI/Novo Banco market share, 2014E
BPI Novo Banco
BPI+Novo
Banco Portugal Mkt share
Loans 25,191 38,569 63,760 263,893 24%
Assets 41,287 72,465 113,752 449,356 25%
Deposits 24,380 27,281 51,661 250,571 21%
Capital 2,104 5,241 7,345 29,305 25%
Source: Mediobanca Securities, company data, APB
Chart 8: branch market share
Source: Mediobanca Securities, company data, APB
23%
24%24%
20%
25%25%
24%
22%
22%
9%
22%
0%
5%
10%
15%
20%
25%
30%
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Caixa Bank
02 March 2015 ◆ 24
Price: € 4.11 Target price: € 4.40 Neutral
In-market synergies would be much more visible for the market
There is very little the market knows about Novo Banco. The opening balance as at Dec-14 is the
main information available and there is no detail on P&L as yet. Therefore, to assess the magnitude
of potential cost synergies, we estimate the cost base by applying a 1.5% of total assets in line with
the Portuguese business of BPI. This provides €1.1bn total costs at Novo Banco. Synergy targets in
line with the aggressive cost cutting plans of the Spanish integrations of the recent years (see Table
11) would provide for €0.4bn cost synergies or €0.3bn after tax.
Base case: 6% EPS adj. accretion with €5.5bn rights issue keeping CET1 at 11%...
Table 19 simulates the merger between CABK, BPI and Novo Banco to assess the impact to CABK
adj. EPS, ROI and impact to Basel III fully loaded CET1 ratio.
By definition, a three-way merger is a complex operation with higher execution risks. We believe
modelling the CABK/BPI/NB combination is particularly challenging given the following
uncertainties:
The little knowledge available on Novo Banco, requiring a number of benchmarking
exercises to assess costs - and subsequent restructuring costs and cost synergies - and a
fair value to calculate the financials of the deal on, including the potential badwill
generation;
The potential requirement by regulators for BPI to dispose of African businesses, with little
reference as to the market value of those assets;
The redefinition of BPI ex-Africa and its perspective growth in earnings and RWAs;
The mechanics of the potential deal, which require making an assumption on which is the
integrating entity and if the Portuguese business would indeed remain listed or merged
into CABK;
The approach of CABK to capital ratios and the will to use equity stake disposals to fund
the acquisition;
The dividend policy post deal.
Our analysis follows from the following assumptions:
We assume the integration to follow a two-step process with BPI buying Novo Banco in cash
(as Portugal would likely prefer this to a paper deal) through a capital raise and CABK
supporting BPI’s capital raising and in turn raising capital to defend an 11% FL CET1 ratio
(hence no sale of equity stakes and no loss of earnings);
We assume CABK to completely absorb the two Portuguese banks, leaving no listed
minorities, and to proceed with the sale of BPI’s African businesses as per Table 14 and
therefore deduct the corresponding profits and the current pro-rata BPI contribution to
Table 18: BPI/Novo Banco synergy estimate
2014 2015 2016 2017
Novo Banco costs @ 1.55% of assets -1,123
Synergies @ avg Spain in market deals
399
Phasing
50% 75% 100%
Synergies
200 299 399
After tax synergies 146 219 291
Source: Mediobanca Securities, company data
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In-market synergies would be much more visible for the market
There is very little the market knows about Novo Banco. The opening balance as at Dec-14 is the
main information available and there is no detail on P&L as yet. Therefore, to assess the magnitude
of potential cost synergies, we estimate the cost base by applying a 1.5% of total assets in line with
the Portuguese business of BPI. This provides €1.1bn total costs at Novo Banco. Synergy targets in
line with the aggressive cost cutting plans of the Spanish integrations of the recent years (see Table
11) would provide for €0.4bn cost synergies or €0.3bn after tax.
Base case: 6% EPS adj. accretion with €5.5bn rights issue keeping CET1 at 11%...
Table 19 simulates the merger between CABK, BPI and Novo Banco to assess the impact to CABK
adj. EPS, ROI and impact to Basel III fully loaded CET1 ratio.
By definition, a three-way merger is a complex operation with higher execution risks. We believe
modelling the CABK/BPI/NB combination is particularly challenging given the following
uncertainties:
The little knowledge available on Novo Banco, requiring a number of benchmarking
exercises to assess costs - and subsequent restructuring costs and cost synergies - and a
fair value to calculate the financials of the deal on, including the potential badwill
generation;
The potential requirement by regulators for BPI to dispose of African businesses, with little
reference as to the market value of those assets;
The redefinition of BPI ex-Africa and its perspective growth in earnings and RWAs;
The mechanics of the potential deal, which require making an assumption on which is the
integrating entity and if the Portuguese business would indeed remain listed or merged
into CABK;
The approach of CABK to capital ratios and the will to use equity stake disposals to fund
the acquisition;
The dividend policy post deal.
Our analysis follows from the following assumptions:
We assume the integration to follow a two-step process with BPI buying Novo Banco in cash
(as Portugal would likely prefer this to a paper deal) through a capital raise and CABK
supporting BPI’s capital raising and in turn raising capital to defend an 11% FL CET1 ratio
(hence no sale of equity stakes and no loss of earnings);
We assume CABK to completely absorb the two Portuguese banks, leaving no listed
minorities, and to proceed with the sale of BPI’s African businesses as per Table 14 and
therefore deduct the corresponding profits and the current pro-rata BPI contribution to
Table 18: BPI/Novo Banco synergy estimate
2014 2015 2016 2017
Novo Banco costs @ 1.55% of assets -1,123
Synergies @ avg Spain in market deals
399
Phasing
50% 75% 100%
Synergies
200 299 399
After tax synergies 146 219 291
Source: Mediobanca Securities, company data
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CABK earnings embedded in 2015-17E. The sale also results in €0.8bn boost to CET1 ratio
(or a smaller capital raising);
We assume the BPI/Novo Banco merger to provide cost synergies (no revenue synergies) as
per Table 18 and assume restructuring costs at 40% of Novo Banco’s costs to be booked
over first two years at a 75-25 split;
We discard the €130m synergy target of CABK on BPI given the lower visibility and the large
risk of double counting with the BPI/Novo Banco synergies;
We consolidate €62bn RWAs from BPI/Novo Banco (€20bn from BPI, €50bn from Novo
Banco), excluding €8bn RWA from BPI’s African businesses;
We use BPI consensus estimates to project future profits and deduct African profits
assuming a 6% CAGR as per historical average. For Novo Banco, we apply the average
expected ROTE from peers (BCP consensus and SAN Totta from MBe). We grow BPI/Novo
Banco Portuguese RWA in line with our RWA growth estimate at CABK.
The combination results in 340bp CET1 stretch, taking 2015E FL CET1 ratio for CABK to 8.5%. We
assume CABK considering 11% the minimum level in line with the indication provided on the BPI VTO
call. This would require €5.5bn capital increase, which would imply 1.4bn new CABK shares at the
current €4.0 share price.
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CABK earnings embedded in 2015-17E. The sale also results in €0.8bn boost to CET1 ratio
(or a smaller capital raising);
We assume the BPI/Novo Banco merger to provide cost synergies (no revenue synergies) as
per Table 18 and assume restructuring costs at 40% of Novo Banco’s costs to be booked
over first two years at a 75-25 split;
We discard the €130m synergy target of CABK on BPI given the lower visibility and the large
risk of double counting with the BPI/Novo Banco synergies;
We consolidate €62bn RWAs from BPI/Novo Banco (€20bn from BPI, €50bn from Novo
Banco), excluding €8bn RWA from BPI’s African businesses;
We use BPI consensus estimates to project future profits and deduct African profits
assuming a 6% CAGR as per historical average. For Novo Banco, we apply the average
expected ROTE from peers (BCP consensus and SAN Totta from MBe). We grow BPI/Novo
Banco Portuguese RWA in line with our RWA growth estimate at CABK.
The combination results in 340bp CET1 stretch, taking 2015E FL CET1 ratio for CABK to 8.5%. We
assume CABK considering 11% the minimum level in line with the indication provided on the BPI VTO
call. This would require €5.5bn capital increase, which would imply 1.4bn new CABK shares at the
current €4.0 share price.
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In summary, the deal would result in:
3% 2015ED EPS dilution and 6% accretion in 2016-17E for 30% increase in CABK net profit;
17% ROI over three years;
11% fully loaded CET1 ratio with no equity stake disposal.
Table 19: simulation of merger model between CABK, BPI and Novo Banco
Impact on Earnings, € Mn 2014 2015E 2016E 2017E
CABK standalone adj. net profit 620 1,496 2,195 2,802
CABK diluted shares, €m 5,712 5,841 5,841 5,841
CABK diluted EPS before rights issue, €sh 0.11 0.26 0.38 0.48
BPI/NB net profits (ex int.)** 552 665 687
Restructuring cost, net -337 -112
Excluding current BPI domestic contribution 65 54 55
Excluding BPI int. contribution** -134 -143 -153
Cost synergy, net 146 219 291
Revenue synergy (lower funding cost), net 0 0 0
BPI/NB Net profit contribution 291 683 881
CABK+BPI/NB adj. net profit 620 1,787 2,877 3,682
CABK diluted shares, €m 5,712 5,841 5,841 5,841
Additional CABK shares from rights issue
CABK new EPS, €/sh 0.11 0.31 0.49 0.63
EPS impact 0% 19% 31% 31%
ROI and Implicit PE 2014 2015E 2016E 2017E
ROI 4.8% 11.3% 14.5%
CABK P/E pre-merger 37.0 15.7 10.7 8.4
Implied PE post-synergies 13.1 8.1 6.4
Impact in capital ratios, €Mn 2014 2015E 2016E 2017E
CABK old RWAs* 145,019 154,875 157,973 164,949
CABK old Core tier 1 capital 16,871 18,473 19,351 20,892
Fully loaded CET1 ratio pre deal 11.6% 11.9% 12.2% 12.7%
BPI/NB (ex. Int) RWAs** 61,990 66,203 67,527 70,510
CABK new RWAs 207,009 221,078 225,500 235,459
CABK FL CET1 capital, pre deal 18,473 19,351 20,892
+Capital increae from BPI/NB 5,549 5,549 5,549
+Capital gain on sale of Africa 801 801 801
-Total goodwill / badwill 0 0 0
+BPI/NB net profit contribution*** 291 633 1,073
CABK FL CET1 capital, post deal 24,313 25,533 27,514
Fully loaded CET1 ratio post deal 11.0% 11.3% 11.7%
Source: Mediobanca Securities, company data
*Basel III FL, **BPI int. 6% profit CAGR, ***50% cash payout from 2016 onwards
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In summary, the deal would result in:
3% 2015ED EPS dilution and 6% accretion in 2016-17E for 30% increase in CABK net profit;
17% ROI over three years;
11% fully loaded CET1 ratio with no equity stake disposal.
Table 19: simulation of merger model between CABK, BPI and Novo Banco
Impact on Earnings, € Mn 2014 2015E 2016E 2017E
CABK standalone adj. net profit 620 1,496 2,195 2,802
CABK diluted shares, €m 5,712 5,841 5,841 5,841
CABK diluted EPS before rights issue, €sh 0.11 0.26 0.38 0.48
BPI/NB net profits (ex int.)** 552 665 687
Restructuring cost, net -337 -112
Excluding current BPI domestic contribution 65 54 55
Excluding BPI int. contribution** -134 -143 -153
Cost synergy, net 146 219 291
Revenue synergy (lower funding cost), net 0 0 0
BPI/NB Net profit contribution 291 683 881
CABK+BPI/NB adj. net profit 620 1,787 2,877 3,682
CABK diluted shares, €m 5,712 5,841 5,841 5,841
Additional CABK shares from rights issue
CABK new EPS, €/sh 0.11 0.31 0.49 0.63
EPS impact 0% 19% 31% 31%
ROI and Implicit PE 2014 2015E 2016E 2017E
ROI 4.8% 11.3% 14.5%
CABK P/E pre-merger 37.0 15.7 10.7 8.4
Implied PE post-synergies 13.1 8.1 6.4
Impact in capital ratios, €Mn 2014 2015E 2016E 2017E
CABK old RWAs* 145,019 154,875 157,973 164,949
CABK old Core tier 1 capital 16,871 18,473 19,351 20,892
Fully loaded CET1 ratio pre deal 11.6% 11.9% 12.2% 12.7%
BPI/NB (ex. Int) RWAs** 61,990 66,203 67,527 70,510
CABK new RWAs 207,009 221,078 225,500 235,459
CABK FL CET1 capital, pre deal 18,473 19,351 20,892
+Capital increae from BPI/NB 5,549 5,549 5,549
+Capital gain on sale of Africa 801 801 801
-Total goodwill / badwill 0 0 0
+BPI/NB net profit contribution*** 291 633 1,073
CABK FL CET1 capital, post deal 24,313 25,533 27,514
Fully loaded CET1 ratio post deal 11.0% 11.3% 11.7%
Source: Mediobanca Securities, company data
*Basel III FL, **BPI int. 6% profit CAGR, ***50% cash payout from 2016 onwards
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...but equity stake sales and minorities could minimise CABK’s capital raising
The Base Case simulation above is the one which attempts to minimise the moving parts from the
potential three-way merger. Clearly there is a multitude of permutations available involving:
Minorities listing of BPI from CABK’s VTO and from the subsequent BPI/Novo Banco merger
which would clearly reduce profit contribution and capital stretch for CABK;
The potential further stretching of CABK’s CET1 FL ratio which would reduce the assumed
cash call;
The disposal of part or all of CABK’s equity stakes to minimise the capital raising at CABK
but with the inevitable side effect of a short term hit to CABK’s profitability.
We have little to guesstimate how successful CABK’s VTO will be on BPI, whether BPI will indeed bid
and win the auction for Novo Banco and if CABK will fund the acquisition and use equity stakes to
minimise capital. Hence we model the ‘full Monty’ version of this potential integration and refer to
the previous chapter of this note to assess how the use of equity stakes could impact EPS accretion
and capital requirements.
Creating Iberia’s bank
CABK potentially representing 14-18% of the Iberian market...
Chart 9 shows the market shares of CABK/BPI/Novo Banco in Spain, Portugal and the Iberian
peninsula. The three banks would hold a joint market share of 16%, 14%, 16% and 18% in Iberian
loans, assets, deposits and branches. The merger would effectively create the incumbent player of
the peninsula, in our view.
...positioning for European cross border M&A
In potentially delivering the BPI/Novo Banco acquisition, CABK would position well for European
cross border M&A, in our view. We believe the European Banking Union is starting to be
implemented faster than the market has realised. So far this year, shortly after the Comprehensive
Assessment publication and the beginning of the SSM regime we have seen:
SAN capitulating on capital raising after four years with €7.5bn ABB;
Chart 9: branch market share
Source: Mediobanca Securities, company data
24%
25%
21%
23%
15%
12%
15%
17%16%
14%
16%
18%
0%
5%
10%
15%
20%
25%
30%
Loans Assets Deposits Branches
BPI/Novo Banco (Portugal)CABK (Spain)CABK+BPI+NB (Iberia)
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...but equity stake sales and minorities could minimise CABK’s capital raising
The Base Case simulation above is the one which attempts to minimise the moving parts from the
potential three-way merger. Clearly there is a multitude of permutations available involving:
Minorities listing of BPI from CABK’s VTO and from the subsequent BPI/Novo Banco merger
which would clearly reduce profit contribution and capital stretch for CABK;
The potential further stretching of CABK’s CET1 FL ratio which would reduce the assumed
cash call;
The disposal of part or all of CABK’s equity stakes to minimise the capital raising at CABK
but with the inevitable side effect of a short term hit to CABK’s profitability.
We have little to guesstimate how successful CABK’s VTO will be on BPI, whether BPI will indeed bid
and win the auction for Novo Banco and if CABK will fund the acquisition and use equity stakes to
minimise capital. Hence we model the ‘full Monty’ version of this potential integration and refer to
the previous chapter of this note to assess how the use of equity stakes could impact EPS accretion
and capital requirements.
Creating Iberia’s bank
CABK potentially representing 14-18% of the Iberian market...
Chart 9 shows the market shares of CABK/BPI/Novo Banco in Spain, Portugal and the Iberian
peninsula. The three banks would hold a joint market share of 16%, 14%, 16% and 18% in Iberian
loans, assets, deposits and branches. The merger would effectively create the incumbent player of
the peninsula, in our view.
...positioning for European cross border M&A
In potentially delivering the BPI/Novo Banco acquisition, CABK would position well for European
cross border M&A, in our view. We believe the European Banking Union is starting to be
implemented faster than the market has realised. So far this year, shortly after the Comprehensive
Assessment publication and the beginning of the SSM regime we have seen:
SAN capitulating on capital raising after four years with €7.5bn ABB;
Chart 9: branch market share
Source: Mediobanca Securities, company data
24%
25%
21%
23%
15%
12%
15%
17%16%
14%
16%
18%
0%
5%
10%
15%
20%
25%
30%
Loans Assets Deposits Branches
BPI/Novo Banco (Portugal)CABK (Spain)CABK+BPI+NB (Iberia)
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Italy approving a lightning reform of Popolari banks after 20 years of chit-chat;
SocGen appointing a chairman very close to the ECB, separating the executive and non-
executive powers previously merged in the chairman/CEO role;
Spain changing the approach to accounting of the Deposit Guarantee Fund costs of banks,
with non-negligible impacts to banks’ CET1 ratios;
Banks geographically diversifying their sovereign bond holdings.
In an interview early this year President Draghi said that for a Banking Union effective in cushioning
asymmetric shocks the creation of larger cross border banks is a necessary factor. We believe that
national markets are quickly proceeding with further consolidation to prepare the forthcoming cross
border combinations.
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Italy approving a lightning reform of Popolari banks after 20 years of chit-chat;
SocGen appointing a chairman very close to the ECB, separating the executive and non-
executive powers previously merged in the chairman/CEO role;
Spain changing the approach to accounting of the Deposit Guarantee Fund costs of banks,
with non-negligible impacts to banks’ CET1 ratios;
Banks geographically diversifying their sovereign bond holdings.
In an interview early this year President Draghi said that for a Banking Union effective in cushioning
asymmetric shocks the creation of larger cross border banks is a necessary factor. We believe that
national markets are quickly proceeding with further consolidation to prepare the forthcoming cross
border combinations.
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CABK is not playing the low cost game
Over the crisis of the last five years Spanish banks transformed through M&A and the
rethinking of their distribution networks. Spanish banks cut over 1/3 of branches, 25%
of loans and 10% of deposits while CABK instead maintained branches and loans
stable, and increased staff and deposits by 10% and 27%. This makes CABK the
mammoth of Spanish banking with a network twice the size of the average
competitor. While the latter concentrated staff in fewer, larger branches to cut costs,
CABK continues with a larger number of smaller branches. We estimate that closing
the branch productivity gap with peers would entail 12% EPS boost from €2 4bn
additional loans. Conversely, adopting the competitors’ setup would allow for 10%
cost cuts, boosting EPS by 18%. The different distribution model – including the full
range of wholly owned product factories - implies higher fixed costs at CABK, but also
higher and cheaper deposit raising capacity, which should play well for a recovering
environment.
Spanish banks structurally transformed over the last five years
Chart 10 shows the 2014/2010 growth in staff, branches, deposits and loans for the major Spanish
banks. We note the very asymmetric trends experienced across banks with those which underwent
sizeable acquisitions exhibiting spectacular growth (SAB above all) and others implementing a strict
diet. In particular:
BKIA is the bank which shrunk the most, as expected: -40% and -53% in staff and branches,
-23% and -32% in deposits and loans;
SAN – the only domestic bank which did not undertake any M&A – follows with -26% and -
28% in staff and branches and boosting deposit gathering with only 5% contraction vs 30% in
customer loans;
SAB is the bank which underwent the largest transformation with a leap in size summarized
by: +63% in staff, +62% in branches, +78% in deposits, +50% in loans.
Hence, there are no clear trends among Spanish banks. CABK grew staff by 10% while cutting
branches by 3% and boosting deposits by 27% with loans up 5%.
Chart 10: 2010-14 growth comparison
Source: Mediobanca Securities, company daya
10%
-3%
27%
2%
8%
-4%
42%
5%
63% 62%
78%
50%
-40%
-53%
-23%
-32%
-26% -28%
-5%
-30%
1% 3%
21%
-17%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Staff Branches customer deposits customer loans
CABK POP SAB BKIA SAN BBVA
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CABK is not playing the low cost game
Over the crisis of the last five years Spanish banks transformed through M&A and the
rethinking of their distribution networks. Spanish banks cut over 1/3 of branches, 25%
of loans and 10% of deposits while CABK instead maintained branches and loans
stable, and increased staff and deposits by 10% and 27%. This makes CABK the
mammoth of Spanish banking with a network twice the size of the average
competitor. While the latter concentrated staff in fewer, larger branches to cut costs,
CABK continues with a larger number of smaller branches. We estimate that closing
the branch productivity gap with peers would entail 12% EPS boost from €2 4bn
additional loans. Conversely, adopting the competitors’ setup would allow for 10%
cost cuts, boosting EPS by 18%. The different distribution model – including the full
range of wholly owned product factories - implies higher fixed costs at CABK, but also
higher and cheaper deposit raising capacity, which should play well for a recovering
environment.
Spanish banks structurally transformed over the last five years
Chart 10 shows the 2014/2010 growth in staff, branches, deposits and loans for the major Spanish
banks. We note the very asymmetric trends experienced across banks with those which underwent
sizeable acquisitions exhibiting spectacular growth (SAB above all) and others implementing a strict
diet. In particular:
BKIA is the bank which shrunk the most, as expected: -40% and -53% in staff and branches,
-23% and -32% in deposits and loans;
SAN – the only domestic bank which did not undertake any M&A – follows with -26% and -
28% in staff and branches and boosting deposit gathering with only 5% contraction vs 30% in
customer loans;
SAB is the bank which underwent the largest transformation with a leap in size summarized
by: +63% in staff, +62% in branches, +78% in deposits, +50% in loans.
Hence, there are no clear trends among Spanish banks. CABK grew staff by 10% while cutting
branches by 3% and boosting deposits by 27% with loans up 5%.
Chart 10: 2010-14 growth comparison
Source: Mediobanca Securities, company daya
10%
-3%
27%
2%
8%
-4%
42%
5%
63% 62%
78%
50%
-40%
-53%
-23%
-32%
-26% -28%
-5%
-30%
1% 3%
21%
-17%
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Staff Branches customer deposits customer loans
CABK POP SAB BKIA SAN BBVA
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Mammoth network (smaller branches) requires higher fixed costs…
Chart 11 shows the comparison at 2014YE across Spanish banks (Spanish businesses for SAN and
BBVA) of branches (lhs), cost/deposits, cost/loans. CABK holds a network of over 5,200 branches
before the Barclays Spain acquisition. This is already twice the average network of competitors and
1.6-1.7x larger than SAN and BBVA, making CABK the dominant franchise on the Spanish streets.
Comparing cost/deposits and cost/loans should provide us with indications on:
1) Economies of scale
2) The exploitation of the network and the room for future growth
In relative terms, CABK stands at 10% premium vs the peer average. BKIA emerges as the low cost
player with the smallest network after the halving of it over the last four years and costs 16-18%
below peers. SAN is the only player with more deposits than loans, reflected in the cost/loans ratio
well above the cost/deposits one.
...with cheaper and smaller branches, but dearer staff...
Chart 12 and Chart 13 map the comparison of cost/employee and cost/branch across Spanish banks
and the evolution of the average size of Spanish banks’ branches, respectively. The former shows
that Spain currently has a multitude of models:
BKIA shows higher staff remuneration and branch costs in line with peers, likely reflecting
the sharpest staff reduction of the panel (-40% in 4 years);
SAN and SAB are at opposite ends but not far from the average, with the former showing
higher staff remuneration and branch cost – also likely reflecting the skew towards city
locations – and the latter with lower staff remuneration and lower branch costs, probably
reflecting the lower levels of the large acquisitions made in the cajas space;
POP and BBVA go hand in hand with branch costs in line with the average and with staff
remuneration 15% below peers;
CABK is far from all peers, with relatively high remuneration (14% premium) but branches
coming at half price.
Chart 12: staff cost/staff vs G&A/branch comparison for Spanish banks, 2014
Chart 11: Spanish banks comparison for branches, cost/deposits, cost/branches, 2014
Source: Mediobanca Securities, company data
0.012
0.014
0.016
0.018
0.020
0.022
0
1,000
2,000
3,000
4,000
5,000
6,000
CABK POP SAB BKIA SAN BBVAavg peer
€
mn
Branches
Branches (lhs)Costs/deposits (rhs)Costs/loans (rhs)
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Mammoth network (smaller branches) requires higher fixed costs…
Chart 11 shows the comparison at 2014YE across Spanish banks (Spanish businesses for SAN and
BBVA) of branches (lhs), cost/deposits, cost/loans. CABK holds a network of over 5,200 branches
before the Barclays Spain acquisition. This is already twice the average network of competitors and
1.6-1.7x larger than SAN and BBVA, making CABK the dominant franchise on the Spanish streets.
Comparing cost/deposits and cost/loans should provide us with indications on:
1) Economies of scale
2) The exploitation of the network and the room for future growth
In relative terms, CABK stands at 10% premium vs the peer average. BKIA emerges as the low cost
player with the smallest network after the halving of it over the last four years and costs 16-18%
below peers. SAN is the only player with more deposits than loans, reflected in the cost/loans ratio
well above the cost/deposits one.
...with cheaper and smaller branches, but dearer staff...
Chart 12 and Chart 13 map the comparison of cost/employee and cost/branch across Spanish banks
and the evolution of the average size of Spanish banks’ branches, respectively. The former shows
that Spain currently has a multitude of models:
BKIA shows higher staff remuneration and branch costs in line with peers, likely reflecting
the sharpest staff reduction of the panel (-40% in 4 years);
SAN and SAB are at opposite ends but not far from the average, with the former showing
higher staff remuneration and branch cost – also likely reflecting the skew towards city
locations – and the latter with lower staff remuneration and lower branch costs, probably
reflecting the lower levels of the large acquisitions made in the cajas space;
POP and BBVA go hand in hand with branch costs in line with the average and with staff
remuneration 15% below peers;
CABK is far from all peers, with relatively high remuneration (14% premium) but branches
coming at half price.
Chart 12: staff cost/staff vs G&A/branch comparison for Spanish banks, 2014
Chart 11: Spanish banks comparison for branches, cost/deposits, cost/branches, 2014
Source: Mediobanca Securities, company data
0.012
0.014
0.016
0.018
0.020
0.022
0
1,000
2,000
3,000
4,000
5,000
6,000
CABK POP SAB BKIA SAN BBVAavg peer
€
mn
Branches
Branches (lhs)Costs/deposits (rhs)Costs/loans (rhs)
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Caixa Bank
02 March 2015 ◆ 31
Price: € 4.11 Target price: € 4.40 Neutral
Source: Mediobanca Securities, company data
Chart 13 shows that CABK runs much smaller branches with less than six staff per branch or c.25%
below the peer average. This explains the much lower cost of CABK’s branches and the intrinsically
different business model operated by the huge Catalan bank. In essence, while other players have
redesigned their networks closing branches and focusing on fewer, larger ones to cut costs and
cushion the revenue attrition from the crisis, CABK has maintained a more dense network of smaller
outlets, with the higher fixed and running costs this implies.
...but stronger and cheaper deposit gathering should support stronger growth in a
recovery
Chart 14 shows the comparison of Q414 time deposit remuneration on front book and back book.
With 48bp, CABK is the bank with the second lowest cost of new deposits, after BBVA, but with the
same back book cost of SAB or POP. We believe this shows CABK’s superior pricing power than other
CABK
POP
SAB
BKIA
SAN
BBVA
avg peer
150,000
200,000
250,000
300,000
350,000
400,000
450,000
60,000 65,000 70,000 75,000 80,000 85,000 90,000 95,000
G&A / branch
Staff cost / employee
Chart 13: comparison of staff/branch evolution, 2010-14
Source: Mediobanca Securities, company data
5.2
5.1
5.9
7.3
7.4
7.7
4
5
6
7
8
9
10
2010 2012 2014
CABK POP SAB BKIA SAN BBVA avg peer
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Caixa Bank
02 March 2015 ◆ 31
Price: € 4.11 Target price: € 4.40 Neutral
Source: Mediobanca Securities, company data
Chart 13 shows that CABK runs much smaller branches with less than six staff per branch or c.25%
below the peer average. This explains the much lower cost of CABK’s branches and the intrinsically
different business model operated by the huge Catalan bank. In essence, while other players have
redesigned their networks closing branches and focusing on fewer, larger ones to cut costs and
cushion the revenue attrition from the crisis, CABK has maintained a more dense network of smaller
outlets, with the higher fixed and running costs this implies.
...but stronger and cheaper deposit gathering should support stronger growth in a
recovery
Chart 14 shows the comparison of Q414 time deposit remuneration on front book and back book.
With 48bp, CABK is the bank with the second lowest cost of new deposits, after BBVA, but with the
same back book cost of SAB or POP. We believe this shows CABK’s superior pricing power than other
CABK
POP
SAB
BKIA
SAN
BBVA
avg peer
150,000
200,000
250,000
300,000
350,000
400,000
450,000
60,000 65,000 70,000 75,000 80,000 85,000 90,000 95,000
G&A / branch
Staff cost / employee
Chart 13: comparison of staff/branch evolution, 2010-14
Source: Mediobanca Securities, company data
5.2
5.1
5.9
7.3
7.4
7.7
4
5
6
7
8
9
10
2010 2012 2014
CABK POP SAB BKIA SAN BBVA avg peer
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Caixa Bank
02 March 2015 ◆ 32
Price: € 4.11 Target price: € 4.40 Neutral
domestic peers, possibly deriving from the more dense branch network which captures deposits in
more remote markets characterized by lower pricing competition.
Chart 15 shows the mapping of loans and deposits per branch for Spanish banks in 2014. The slope
of 0.82 suggests banks are not running huge funding gaps. We note that CABK and SAN stand below
the regression line either suggesting they are the banks with the largest potential loan growth (from
the realignment to the regression line) or those with a lower productivity.
Realignment to the mean would generate boost EPS by 12%
Realigning CABK to the regression line in Chart 15 would imply 13% increase in loans per branch
(from €36m to €40.5m loans per branch, i.e. €34m deposits x 0.82 + 12.5) or €24bn additional loans
at group level. Applying the 2014 NIM of 2.15%, 54% C/I and 24% tax rate would retrieve €0.2bn
additional profits, for 12% 2015E EPS boost. This shows the potential for CABK in an expansionary
Chart 14: comparison of back book and front book remuneration of time deposits, Q414
Source: Mediobanca Securities, company data
Chart 15: loans/branch vs deposits/branch comparison for Spanish banks, 2014, € m
Source: Mediobanca Securities, company data
0
20
40
60
80
100
120
140
160
180
BKT POP SAN SAB CABK BBVA
FRONT BOOK
BACK BOOK
CABK
POP
SAB
BKIA
SAN
BBVA
avg peer
30
35
40
45
50
55
60
65
30 35 40 45 50 55 60
loans/branch
deposits/branch
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Caixa Bank
02 March 2015 ◆ 32
Price: € 4.11 Target price: € 4.40 Neutral
domestic peers, possibly deriving from the more dense branch network which captures deposits in
more remote markets characterized by lower pricing competition.
Chart 15 shows the mapping of loans and deposits per branch for Spanish banks in 2014. The slope
of 0.82 suggests banks are not running huge funding gaps. We note that CABK and SAN stand below
the regression line either suggesting they are the banks with the largest potential loan growth (from
the realignment to the regression line) or those with a lower productivity.
Realignment to the mean would generate boost EPS by 12%
Realigning CABK to the regression line in Chart 15 would imply 13% increase in loans per branch
(from €36m to €40.5m loans per branch, i.e. €34m deposits x 0.82 + 12.5) or €24bn additional loans
at group level. Applying the 2014 NIM of 2.15%, 54% C/I and 24% tax rate would retrieve €0.2bn
additional profits, for 12% 2015E EPS boost. This shows the potential for CABK in an expansionary
Chart 14: comparison of back book and front book remuneration of time deposits, Q414
Source: Mediobanca Securities, company data
Chart 15: loans/branch vs deposits/branch comparison for Spanish banks, 2014, € m
Source: Mediobanca Securities, company data
0
20
40
60
80
100
120
140
160
180
BKT POP SAN SAB CABK BBVA
FRONT BOOK
BACK BOOK
CABK
POP
SAB
BKIA
SAN
BBVA
avg peer
30
35
40
45
50
55
60
65
30 35 40 45 50 55 60
loans/branch
deposits/branch
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Caixa Bank
02 March 2015 ◆ 33
Price: € 4.11 Target price: € 4.40 Neutral
environment, i.e. management is accepting higher structural costs from a larger network in
exchange of higher potential balance sheet expansion in the recovery.
10% cost cuts from a change of model for c.18% EPS boost
If instead of realigning productivity of branches to the average, CABK management decided to
adopt their peer’s distribution model, i.e. cutting branches and staff to reduce cost, we estimate
the boost to EPS would be of c.18% according to this methodologies:
Realigning cost/deposits to peers would imply €344m lower costs at CABK given €180bn
2014 deposits;
Realigning deposits/branch to that of peers would imply closing 1/3 of branches which at
an average peer’s cost/branch of €0.93 would imply €372m cost savings
Both methodologies point towards the same magnitude, i.e. c.10% cost cuts which, at 24% tax rate
would imply 17-19% boost to 2015E EPS.
CABK is positioned for economic recovery
CABK’s CEO explained they are happy with their different distribution model and that they have no
intention of changing it. We conclude that CABK is positioned to capture the recovery through
higher than peer balance sheet growth on the assumption that the larger deposit gathering provided
by the larger network will outperform the benefits of the higher operating leverage they would gain
from reducing costs at perhaps the cost of lower loan growth.
Table 20: simulation of CABK costs
CABK CABK adj. Cost savings
As % of
CABK costs
As % of
2015E
Costs/deposits, € m 0.021 0.019
Costs, € m -3,770 -3,426 344 -9% 17%
Deposits, € m 180,200 180,200
Deposits/branch, € m 34 49
Branches 5,522 3,664 -1,858
Costs/branch, € m (0.72) (0.93)
Costs, € m -3,770 -3,398 372 -10% 19%
Source: Mediobanca Securities, company data
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Caixa Bank
02 March 2015 ◆ 33
Price: € 4.11 Target price: € 4.40 Neutral
environment, i.e. management is accepting higher structural costs from a larger network in
exchange of higher potential balance sheet expansion in the recovery.
10% cost cuts from a change of model for c.18% EPS boost
If instead of realigning productivity of branches to the average, CABK management decided to
adopt their peer’s distribution model, i.e. cutting branches and staff to reduce cost, we estimate
the boost to EPS would be of c.18% according to this methodologies:
Realigning cost/deposits to peers would imply €344m lower costs at CABK given €180bn
2014 deposits;
Realigning deposits/branch to that of peers would imply closing 1/3 of branches which at
an average peer’s cost/branch of €0.93 would imply €372m cost savings
Both methodologies point towards the same magnitude, i.e. c.10% cost cuts which, at 24% tax rate
would imply 17-19% boost to 2015E EPS.
CABK is positioned for economic recovery
CABK’s CEO explained they are happy with their different distribution model and that they have no
intention of changing it. We conclude that CABK is positioned to capture the recovery through
higher than peer balance sheet growth on the assumption that the larger deposit gathering provided
by the larger network will outperform the benefits of the higher operating leverage they would gain
from reducing costs at perhaps the cost of lower loan growth.
Table 20: simulation of CABK costs
CABK CABK adj. Cost savings
As % of
CABK costs
As % of
2015E
Costs/deposits, € m 0.021 0.019
Costs, € m -3,770 -3,426 344 -9% 17%
Deposits, € m 180,200 180,200
Deposits/branch, € m 34 49
Branches 5,522 3,664 -1,858
Costs/branch, € m (0.72) (0.93)
Costs, € m -3,770 -3,398 372 -10% 19%
Source: Mediobanca Securities, company data
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Caixa Bank
02 March 2015 ◆ 34
Price: € 4.11 Target price: € 4.40 Neutral
30% swing around our €4.4 TP – Staying Neutral
We run the sensitivity of our €4.4 2015E Target Price (TP) to the four scenarios
depicted in the note, namely: 1) the takeover of BPI/Novo Banco funded by a €5.5bn
cash call, 2) the same deal but funded by stake disposals, 3) the realignment of CABK
profitability through higher branch productivity, 4) cost cutting through branch
closures in line with peers. We conclude that scenario 1 plus 3 or 4 would deliver
+20% boost to our TP, while 3 would provide for -9% swing. This shows CABK valuation
is positively skewed to management action and we stay Neutral on CABK while
awaiting inputs on these items and on management’s plans to boost organic
profitability from tomorrow’s Investor Day.
+20% from cash call-funded M&A and organic profitability improvement; -9% from
stake disposal
We hold a Neutral rating on CABK and €4.4 2015E Target Price (see Table 21) based on the following
methodology:
1) We allocate a 10% minimum capital requirement to the €149bn RWAs to obtain allocated
capital;
2) We apply a 12.1% over the cycle ROAC which implies a higher profitability from CABK in a
normalized macroeconomic environment compared to the 10% level we retrieve on 2015E;
3) We estimate a cost of capital of 8.3% by multiplying the risk free rate to the stock’s beta
and to the 5.5% market premium we adopt across all European banks;
4) This retrieves a 1.45x valuation multiple providing for €21.7bn value;
5) To this we add the excess capital deriving from our estimated 2015E FL CET1 ratio minus
the allocated capital and the MTM of equity stakes.
We then analyze the sensitivity of our Target Price to the M&A and restructuring scenarios depicted
in the note, namely:
1. BPI/NB takeover and €5.5bn cash call: we assume a 12.8% sustainable RoAC at CABK
based on the discounting of the 2017E earnings boost from the acquisitions of BPI and NB
and an increase of allocated capital in line with the additional RWAs. On the dilutive side,
the latter would limit excess capital to €1.8bn, coupled with the new shares deriving from
the €5.5bn rights issue. This would lead to a fair value of €4.8, 9% above MB's TP and 18%
above the current price.
2. BPI/NB takeover and equity stakes disposal: this scenario assumes the funding of the
acquisition of BPI and NB through the sale of CABK’s stakes portfolio and a partial balance
sheet gearing. This would lead CABK to a CET1 ratio below the 10% capital allocation
constraint despite the RWA deconsolidation from stake disposals. This would result in €1bn
capital deficit and a fair value of €4.0, 9% below MB's TP and in line with the current price.
Table 21: CABK 2015E valuation
PTP Taxes
Adj. Net
Profit
RWAs
MB
capital
/RWA
Weight
range
Allocated
capital
ROAC
Over the
cycle ROAC
Cost of
capital
P/TB
V
Value
Capital
deficit/
excess
Per
share
CaixaBank 1,968 -472 1,496 149,001 10.0% 6-9% 14,900 10.0% 12.1% 8.3% 1.45 21,722 4,017 4.4
Source: Mediobanca Securities
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Caixa Bank
02 March 2015 ◆ 34
Price: € 4.11 Target price: € 4.40 Neutral
30% swing around our €4.4 TP – Staying Neutral
We run the sensitivity of our €4.4 2015E Target Price (TP) to the four scenarios
depicted in the note, namely: 1) the takeover of BPI/Novo Banco funded by a €5.5bn
cash call, 2) the same deal but funded by stake disposals, 3) the realignment of CABK
profitability through higher branch productivity, 4) cost cutting through branch
closures in line with peers. We conclude that scenario 1 plus 3 or 4 would deliver
+20% boost to our TP, while 3 would provide for -9% swing. This shows CABK valuation
is positively skewed to management action and we stay Neutral on CABK while
awaiting inputs on these items and on management’s plans to boost organic
profitability from tomorrow’s Investor Day.
+20% from cash call-funded M&A and organic profitability improvement; -9% from
stake disposal
We hold a Neutral rating on CABK and €4.4 2015E Target Price (see Table 21) based on the following
methodology:
1) We allocate a 10% minimum capital requirement to the €149bn RWAs to obtain allocated
capital;
2) We apply a 12.1% over the cycle ROAC which implies a higher profitability from CABK in a
normalized macroeconomic environment compared to the 10% level we retrieve on 2015E;
3) We estimate a cost of capital of 8.3% by multiplying the risk free rate to the stock’s beta
and to the 5.5% market premium we adopt across all European banks;
4) This retrieves a 1.45x valuation multiple providing for €21.7bn value;
5) To this we add the excess capital deriving from our estimated 2015E FL CET1 ratio minus
the allocated capital and the MTM of equity stakes.
We then analyze the sensitivity of our Target Price to the M&A and restructuring scenarios depicted
in the note, namely:
1. BPI/NB takeover and €5.5bn cash call: we assume a 12.8% sustainable RoAC at CABK
based on the discounting of the 2017E earnings boost from the acquisitions of BPI and NB
and an increase of allocated capital in line with the additional RWAs. On the dilutive side,
the latter would limit excess capital to €1.8bn, coupled with the new shares deriving from
the €5.5bn rights issue. This would lead to a fair value of €4.8, 9% above MB's TP and 18%
above the current price.
2. BPI/NB takeover and equity stakes disposal: this scenario assumes the funding of the
acquisition of BPI and NB through the sale of CABK’s stakes portfolio and a partial balance
sheet gearing. This would lead CABK to a CET1 ratio below the 10% capital allocation
constraint despite the RWA deconsolidation from stake disposals. This would result in €1bn
capital deficit and a fair value of €4.0, 9% below MB's TP and in line with the current price.
Table 21: CABK 2015E valuation
PTP Taxes
Adj. Net
Profit
RWAs
MB
capital
/RWA
Weight
range
Allocated
capital
ROAC
Over the
cycle ROAC
Cost of
capital
P/TB
V
Value
Capital
deficit/
excess
Per
share
CaixaBank 1,968 -472 1,496 149,001 10.0% 6-9% 14,900 10.0% 12.1% 8.3% 1.45 21,722 4,017 4.4
Source: Mediobanca Securities
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Caixa Bank
02 March 2015 ◆ 35
Price: € 4.11 Target price: € 4.40 Neutral
3. Branch productivity realignment: we analyze the impact to valuation of CABK increasing
its branch network productivity in-line with peers and increase loans by €24bn (€18bn
RWAs) and profits by €0.2bn. On the positives, we value extra earnings at 10x PE for €2bn
additional valuation. On the negatives, the higher RWAs imply higher allocated capital and
lower excess capital (€2.2bn). These lead to a CABK fair value of €4.9, 11% above MB's TP
and 20% above the current price.
4. Cost cutting realignment: we analyze the impact of CABK adopting competitors’
distribution model and cutting costs. On the positives, we value extra earnings at 10x PE
for €2.7bn additional valuation. There is no other change to valuation, leading to a CABK
fair value of €4.9, 11% above MB's TP and 20% above the current price.
Interestingly, scenario 3 and 4 result in the same fair value as the higher allocated capital of the
former triggered by the additional RWAs drives a valuation re-rating given the 1.5x valuation
multiple which compensates for the lower excess capital and the lower valuation boost from
additional earnings compared to scenario 4.
Chart 16: sensitivity of CABK Target Price to M&A and restructuring scenarios, 2015E
Source: Mediobanca Securities
Our analysis highlights that CABK could be before a binary call on valuation; on one hand, stake
sales without a rights issue would leave 9% downside from our current TP, while a positive evolution
of cost controls and the acquisitions of BPI/NB would lead to a 20% upside, implying a net positive
skew of CABK valuation to management actions.
Staying Neutral while awaiting news on M&A, stake disposals and organic growth from
the Investor Day
Before the BPI deal, CABK could have been considered a safe play on Spain with upside potential
from the capital redeployment angle. But after the balance sheet gearing, we see the disposal plan
as a necessity and CABK increasing its beta gearing on Iberian macro. We stay Neutral while
awaiting to receive inputs from management at tomorrow’s Investor Day on the key swing factors
analyzed in this note and on management’s intentions to drive profitability up.
4.4
4.8
4.0
4.9 4.9
3.5
4
4.5
5
Inital TPBPI+NB takeover
and capital raise
BPI+NB takeover
and stake sales
Realign
profitability
Cut costs
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Caixa Bank
02 March 2015 ◆ 35
Price: € 4.11 Target price: € 4.40 Neutral
3. Branch productivity realignment: we analyze the impact to valuation of CABK increasing
its branch network productivity in-line with peers and increase loans by €24bn (€18bn
RWAs) and profits by €0.2bn. On the positives, we value extra earnings at 10x PE for €2bn
additional valuation. On the negatives, the higher RWAs imply higher allocated capital and
lower excess capital (€2.2bn). These lead to a CABK fair value of €4.9, 11% above MB's TP
and 20% above the current price.
4. Cost cutting realignment: we analyze the impact of CABK adopting competitors’
distribution model and cutting costs. On the positives, we value extra earnings at 10x PE
for €2.7bn additional valuation. There is no other change to valuation, leading to a CABK
fair value of €4.9, 11% above MB's TP and 20% above the current price.
Interestingly, scenario 3 and 4 result in the same fair value as the higher allocated capital of the
former triggered by the additional RWAs drives a valuation re-rating given the 1.5x valuation
multiple which compensates for the lower excess capital and the lower valuation boost from
additional earnings compared to scenario 4.
Chart 16: sensitivity of CABK Target Price to M&A and restructuring scenarios, 2015E
Source: Mediobanca Securities
Our analysis highlights that CABK could be before a binary call on valuation; on one hand, stake
sales without a rights issue would leave 9% downside from our current TP, while a positive evolution
of cost controls and the acquisitions of BPI/NB would lead to a 20% upside, implying a net positive
skew of CABK valuation to management actions.
Staying Neutral while awaiting news on M&A, stake disposals and organic growth from
the Investor Day
Before the BPI deal, CABK could have been considered a safe play on Spain with upside potential
from the capital redeployment angle. But after the balance sheet gearing, we see the disposal plan
as a necessity and CABK increasing its beta gearing on Iberian macro. We stay Neutral while
awaiting to receive inputs from management at tomorrow’s Investor Day on the key swing factors
analyzed in this note and on management’s intentions to drive profitability up.
4.4
4.8
4.0
4.9 4.9
3.5
4
4.5
5
Inital TPBPI+NB takeover
and capital raise
BPI+NB takeover
and stake sales
Realign
profitability
Cut costs
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Disclaimer
02 March 2015 ◆ 36
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may effect transactions in the securities described herein for their own account or for the account of others, may have long or short
positions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services
for such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the management
of conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities
industry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior
This report is intended for [email protected] from [email protected]
Disclaimer
02 March 2015 ◆ 36
GENERAL DISCLOSURES
This research report is prepared by Mediobanca - Banca di credito finanziario S.p.A. ("Mediobanca S.p.A."), authorized and supervised by
Bank of Italy and Consob to provide financial services, and is compliant with the relevant European Directive provisions on investment and
ancillary services (MiFID Directive) and with the implementing law.
Unless specified to the contrary, within EU Member States, the report is made available by Mediobanca S.p.A. The distribution of this
document by Mediobanca S.p.A. in other jurisdictions may be restricted by law and persons into whose possession this document comes
should inform themselves about, and observe, any such restrictions. All reports are disseminated and available to all clients simultaneously
through electronic distribution and publication to our internal client websites. The recipient acknowledges that, to the extent permitted by
applicable securities laws and regulations, Mediobanca S.p.A. disclaims all liability for providing this research, and accepts no liability
whatsoever for any direct, indirect or consequential loss arising from the use of this document or its contents. This research report is
provided for information purposes only and does not constitute or should not be construed as a provision of investment advice, an offer to
buy or sell, or a solicitation of an offer to buy or sell, any financial instruments. It is not intended to represent the conclusive terms and
conditions of any security or transaction, nor to notify you of any possible risks, direct or indirect, in undertaking such a transaction. Not all
investment strategies are appropriate at all times, and past performance is not necessarily a guide to future performance. Mediobanca
S.p.A. recommends that independent advice should be sought, and that investors should make their own independent decisions as to
whether an investment or instrument is proper or appropriate based on their own individual judgment, their risk-tolerance, and after
consulting their own investment advisers. Unless you notify Mediobanca S.p.A. otherwise, Mediobanca S.p.A. assumes that you have
sufficient knowledge, experience and/or professional advice to undertake your own assessment. This research is intended for use only by
those professional clients to whom it is made available by Mediobanca S.p.A. The information contained herein, including any expression of
opinion, has been obtained from or is based upon sources believed to be reliable but is not guaranteed as to accuracy or completeness
although Mediobanca S.p.A. considers it to be fair and not misleading. Any opinions or estimates expressed herein reflect the judgment of
the author(s) as of the date the research was prepared and are subject to change at any time without notice. Unless otherwise stated, the
information or opinions presented, or the research or analysis upon which they are based, are updated as necessary and at least annually.
Mediobanca S.p.A. may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not
imply that Mediobanca S.p.A. endorses, recommends or approves any material on the linked page or accessible from it. Mediobanca S.p.A.
does not accept responsibility whatsoever for any such material, nor for any consequences of its use. Neither Mediobanca S.p.A. nor any of
its directors, officers, employees or agents shall have any liability, howsoever arising, for any error, inaccuracy or incompleteness of fact or
opinion in this report or lack of care in its preparation or publication.
Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and
our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our proprietary trading
desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this
research. The analysts named in this report may have from time to time discussed with our clients, including Mediobanca S.p.A.
salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term
impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts'
published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts'
fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein.
ADDITIONAL DISCLAIMERS TO U.K. INVESTORS: Mediobanca S.p.A. provides investment services in the UK through a branch established in
the UK (as well as directly from its establishment(s) in Italy) pursuant to its passporting rights under applicable EEA Banking and Financial
Services Directives and in accordance with applicable Financial Services Authority requirements.
ADDITIONAL DISCLAIMERS TO U.S. INVESTORS: This research report is prepared by Mediobanca S.p.A. and distributed in the United States
by Mediobanca Securities USA LLC, which is a wholly owned subsidiary of Mediobanca S.p.A., is a member of Finra and is registered with the
US Securities and Exchange Commission. 565 Fifth Avenue - New York NY 10017. Mediobanca Securities USA LLC accepts responsibility for
the content of this report. Any US person receiving this report and wishing to effect any transaction in any security discussed in this report
should contact Mediobanca Securities USA LLC at 001(212) 991-4745. Please refer to the contact page for additional contact information. All
transactions by a US person in the securities mentioned in this report must be effected through Mediobanca Securities USA LLC and not
through a non-US affiliate. The research analyst(s) named on this report are not registered / qualified as research analysts with Finra. The
research analyst(s) are not associated persons of Mediobanca Securities USA LLC and therefore are not subject to NASD rule 2711 and
incorporated NYSE rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
research analyst.
ADDITIONAL DISCLAIMERS TO U.A.E. INVESTORS: This research report has not been approved or licensed by the UAE Central Bank, the UAE
Securities and Commodities Authority (SCA), the Dubai Financial Services Authority (DFSA) or any other relevant licensing authorities in the
UAE, and does not constitute a public offer of securities in the UAE in accordance with the commercial companies law, Federal Law No. 8 of
1984 (as amended), SCA Resolution No.(37) of 2012 or otherwise. This research report is strictly private and confidential and is being issued
to sophisticated investors.
REGULATORY DISCLOSURES
Mediobanca S.p.A. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Mediobanca S.p.A. or its affiliates or its employees
may effect transactions in the securities described herein for their own account or for the account of others, may have long or short
positions with the issuer thereof, or any of its affiliates, or may perform or seek to perform securities, investment banking or other services
for such issuer or its affiliates. The organisational and administrative arrangements established by Mediobanca S.p.A. for the management
of conflicts of interest with respect to investment research are consistent with rules, regulations or codes applicable to the securities
industry. The compensation of the analyst who prepared this report is determined exclusively by research management and senior
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
Disclaimer
02 March 2015 ◆ 37
management (not including investment banking). Analyst compensation is not based on investment banking revenues, however,
compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.
For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence of
researches prepared by Mediobanca's analysts, please refer to the research policy which can be found at the following link:
http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdf
Unless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/or
comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this
fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is
used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen
changes in competitive pressures or in the level of demand for the company's products. Such demand variations may result from changes in
technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by
changes in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differently
specified.
Since 1 July 2013, Mediobanca uses a relative rating system, based on the following judgements: Outperform, Neutral, Underperform and
Not Rated.
Outperform (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's)
coverage universe, on a risk-adjusted basis, over the next 6-12 months.
Neutral (N). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's)
coverage universe, on a risk-adjusted basis, over the next 6-12 months.
Underperform (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry (team's)
coverage universe, on a risk-adjusted basis, over the next 6-12 months.
Not Rated (NR). Currently the analyst does not have adequate confidence about the stock's total return relative to the average total
return of the analyst's industry (or industry team's) coverage, on a risk-adjusted basis, over the next 6-12 months. Alternatively, it is
applicable pursuant to Mediobanca policy in circumstances when Mediobanca is acting in any advisory capacity in a strategic transaction
involving this company or when the company is the target of a tender offer.
Our recommendation relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected
relative performance relies upon a valuation process that is based on the analysis of the company's business model / competitive positioning
/ financial forecasts. The company's valuation could change in the future as a consequence of a modification of the mentioned items.
Please consider that the above rating system also drives the portfolio selections of the Mediobanca's analysts as follows: long positions can
only apply to stocks rated Outperform and Neutral; short positions can only apply to stocks rated Underperform and Neutral; portfolios
selection cannot refer to Not Rated stocks; Mediobanca portfolios might follow different time horizons.
Proportion of all recommendations relating to the last quarter:
Outperform Neutral Underperform Not Rated
51.72% 43.94% 3.43% 0.92%
Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the last quarter:
Outperform Neutral Underperform Not Rated
12.50% 12.86% 14.29% 33.33%
The current stock ratings system has been used since 1 July 2013. Before then, Mediobanca S.p.A. used a different system, based on the
following ratings: outperform, neutral, underperform, under review, not rated. For additional details about the old ratings system, please
access research reports dated before 1 July 2013 from the restricted part of the "MB Securities" section of the Mediobanca S.p.A. website at
www.mediobanca.com.
COMPANY SPECIFIC REGULATORY DISCLOSURES
This report is intended for [email protected] from [email protected]
Disclaimer
02 March 2015 ◆ 37
management (not including investment banking). Analyst compensation is not based on investment banking revenues, however,
compensation may relate to the revenues of Mediobanca S.p.A. as a whole, of which investment banking, sales and trading are a part.
For a detailed explanation of the policies and principles implemented by Mediobanca S.p.A. to guarantee the integrity and independence of
researches prepared by Mediobanca's analysts, please refer to the research policy which can be found at the following link:
http://www.mediobanca.it/static/upload/b5d/b5d01c423f1f84fffea37bd41ccf7d74.pdf
Unless otherwise stated in the text of the research report, target prices are based on either a discounted cash flow valuation and/or
comparison of valuation ratios with companies seen by the analyst as comparable or a combination of the two methods. The result of this
fundamental valuation is adjusted to reflect the analyst's views on the likely course of investor sentiment. Whichever valuation method is
used there is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen
changes in competitive pressures or in the level of demand for the company's products. Such demand variations may result from changes in
technology, in the overall level of economic activity or, in some cases, from changes in social values. Valuations may also be affected by
changes in taxation, in exchange rates and, in certain industries, in regulations. All prices are market close prices unless differently
specified.
Since 1 July 2013, Mediobanca uses a relative rating system, based on the following judgements: Outperform, Neutral, Underperform and
Not Rated.
Outperform (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's)
coverage universe, on a risk-adjusted basis, over the next 6-12 months.
Neutral (N). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's)
coverage universe, on a risk-adjusted basis, over the next 6-12 months.
Underperform (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry (team's)
coverage universe, on a risk-adjusted basis, over the next 6-12 months.
Not Rated (NR). Currently the analyst does not have adequate confidence about the stock's total return relative to the average total
return of the analyst's industry (or industry team's) coverage, on a risk-adjusted basis, over the next 6-12 months. Alternatively, it is
applicable pursuant to Mediobanca policy in circumstances when Mediobanca is acting in any advisory capacity in a strategic transaction
involving this company or when the company is the target of a tender offer.
Our recommendation relies upon the expected relative performance of the stock considered versus its benchmark. Such an expected
relative performance relies upon a valuation process that is based on the analysis of the company's business model / competitive positioning
/ financial forecasts. The company's valuation could change in the future as a consequence of a modification of the mentioned items.
Please consider that the above rating system also drives the portfolio selections of the Mediobanca's analysts as follows: long positions can
only apply to stocks rated Outperform and Neutral; short positions can only apply to stocks rated Underperform and Neutral; portfolios
selection cannot refer to Not Rated stocks; Mediobanca portfolios might follow different time horizons.
Proportion of all recommendations relating to the last quarter:
Outperform Neutral Underperform Not Rated
51.72% 43.94% 3.43% 0.92%
Proportion of issuers to which Mediobanca S.p.A. has supplied material investment banking services relating to the last quarter:
Outperform Neutral Underperform Not Rated
12.50% 12.86% 14.29% 33.33%
The current stock ratings system has been used since 1 July 2013. Before then, Mediobanca S.p.A. used a different system, based on the
following ratings: outperform, neutral, underperform, under review, not rated. For additional details about the old ratings system, please
access research reports dated before 1 July 2013 from the restricted part of the "MB Securities" section of the Mediobanca S.p.A. website at
www.mediobanca.com.
COMPANY SPECIFIC REGULATORY DISCLOSURES
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
Disclaimer
02 March 2015 ◆ 38
MARKET MAKER
Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are
materially represented by equity instruments, issued by CAIXABANK.
RATING
In the past 12 months, the rating on CAIXABANK has been changed. The previous rating, issued on 10/10/2012, was UNDERPERFORM. The
present rating in regard to CAIXABANK has not been changed since 23/10/2014.
INITIAL COVERAGE
CAIXABANK initial coverage as of 10/10/2012.
COPYRIGHT NOTICE
No part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the prior
consent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect.
END NOTES
The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian
law.
Additional information is available upon request.
This report is intended for [email protected] from [email protected]
Disclaimer
02 March 2015 ◆ 38
MARKET MAKER
Mediobanca S.p.A. is currently acting as market maker on equity instruments, or derivatives whose underlying financial instruments are
materially represented by equity instruments, issued by CAIXABANK.
RATING
In the past 12 months, the rating on CAIXABANK has been changed. The previous rating, issued on 10/10/2012, was UNDERPERFORM. The
present rating in regard to CAIXABANK has not been changed since 23/10/2014.
INITIAL COVERAGE
CAIXABANK initial coverage as of 10/10/2012.
COPYRIGHT NOTICE
No part of the content of any research material may be copied, forwarded or duplicated in any form or by any means without the prior
consent of Mediobanca S.p.A., and Mediobanca S.p.A. accepts no liability whatsoever for the actions of third parties in this respect.
END NOTES
The disclosures contained in research reports produced by Mediobanca S.p.A. shall be governed by and construed in accordance with Italian
law.
Additional information is available upon request.
Unauthorized redistribution of this report is prohibited.
This report is intended for [email protected] from [email protected]
MEDIOBANCA – Banca di Credito Finanziario S.p.A.
Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1
33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530
Mediobanca S.p.A.
Antonio Guglielmi
Head of European Equity Research
+44 203 0369 570
[email protected]
ANALYSTS
European Banks
Alain Tchibozo France/IBK +44 203 0369 573 [email protected]
Adam Terelak France/IBK +44 203 0369 574 [email protected]
Andrea Filtri Spain/Italy +44 203 0369 571 [email protected]
Andreas Williams Spain +44 203 0369 577 [email protected]
Riccardo Rovere Italy/Scandinavia/CEE/Germany +39 02 8829 604 [email protected]
European Insurance
Gianluca Ferrari Italy and Reinsurance +39 02 8829 482 [email protected]
Simonetta Chiriotti Nordics +39 02 8829 933 [email protected]
Italian Research
Alessandro Tortora Building Materials/Industrials/Capital Goods +39 02 8829 673 [email protected]
Andrea Scauri Oil & Oil Related/Capital Goods +39 02 8829 496 [email protected]
Chiara Rotelli Branded Goods/Consumers Goods +39 02 8829 931 [email protected]
Fabio Pavan Media/Telecommunications/Consumer Goods +39 02 8829 633 [email protected]
Javier Suárez Utilities +39 028829 036 [email protected]
Massimo Vecchio Auto & Auto Components/Industrials/Holdings +39 02 8829 541 [email protected]
Niccolò Storer Auto & Auto Components/Industrials/Holdings +39 02 8829 444 [email protected]
Nicolò Pessina Consumer Goods/Infrastructure +39 02 8829 796 [email protected]
Simonetta Chiriotti Real Estate/ Industrials +39 02 8829 933 [email protected]
FOR NON US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:
Mediobanca S.p.A.
Charlotte Roden
Head of Equity Sales
+44 203 0369 537
[email protected]
SALES
Angelo Vietri
+39 02 8829 989 [email protected]
Christopher Seidenfaden
+44 203 0369 610 [email protected]
Lorenzo Angeloni
+39 02 8829 507 [email protected]
Timothy Pedroni
+44 203 0369 635 [email protected]
Stephane Langlois
+44 203 0369 582 [email protected]
European Spec Sales
Gaelle Jarrousse Banks +44 203 0369 530 [email protected]
Carlo Pirri Banks +44 203 0369 531 [email protected]
Gert-Jaap Kraan Insurance +44 203 0369 510 [email protected]
Mediobanca S.p.A.
Dominic Bidwell
Head of Equity Trading and Sales Trading
+44 203 0369 627
[email protected]
SALES/TRADERS
Alessandro Gobbi
+39 02 8829 263 [email protected]
Matteo Agrati
+44 203 0369 629 [email protected]
Michael Sherry
+44 203 0369 605 [email protected]
Roberto Riboldi +39 02 8829 639 [email protected]
FOR US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:
Mediobanca Securities USA LLC
Pierluigi Gastone
Head of Mediobanca Securities USA LLC
+1 212 991 4745
[email protected]
Massimiliano Pula
+1 646 839 4911 [email protected]
Robert Perez
+1 646 839 4910 [email protected]
This report is intended for [email protected] from [email protected]
MEDIOBANCA – Banca di Credito Finanziario S.p.A.
Piazzetta Enrico Cuccia, 1 - 20121 Milano - T. +39 02 8829.1
33 Grosvenor Place – London SW1X 7HY – T. +44 (0) 203 0369 530
Mediobanca S.p.A.
Antonio Guglielmi
Head of European Equity Research
+44 203 0369 570
[email protected]
ANALYSTS
European Banks
Alain Tchibozo France/IBK +44 203 0369 573 [email protected]
Adam Terelak France/IBK +44 203 0369 574 [email protected]
Andrea Filtri Spain/Italy +44 203 0369 571 [email protected]
Andreas Williams Spain +44 203 0369 577 [email protected]
Riccardo Rovere Italy/Scandinavia/CEE/Germany +39 02 8829 604 [email protected]
European Insurance
Gianluca Ferrari Italy and Reinsurance +39 02 8829 482 [email protected]
Simonetta Chiriotti Nordics +39 02 8829 933 [email protected]
Italian Research
Alessandro Tortora Building Materials/Industrials/Capital Goods +39 02 8829 673 [email protected]
Andrea Scauri Oil & Oil Related/Capital Goods +39 02 8829 496 [email protected]
Chiara Rotelli Branded Goods/Consumers Goods +39 02 8829 931 [email protected]
Fabio Pavan Media/Telecommunications/Consumer Goods +39 02 8829 633 [email protected]
Javier Suárez Utilities +39 028829 036 [email protected]
Massimo Vecchio Auto & Auto Components/Industrials/Holdings +39 02 8829 541 [email protected]
Niccolò Storer Auto & Auto Components/Industrials/Holdings +39 02 8829 444 [email protected]
Nicolò Pessina Consumer Goods/Infrastructure +39 02 8829 796 [email protected]
Simonetta Chiriotti Real Estate/ Industrials +39 02 8829 933 [email protected]
FOR NON US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:
Mediobanca S.p.A.
Charlotte Roden
Head of Equity Sales
+44 203 0369 537
[email protected]
SALES
Angelo Vietri
+39 02 8829 989 [email protected]
Christopher Seidenfaden
+44 203 0369 610 [email protected]
Lorenzo Angeloni
+39 02 8829 507 [email protected]
Timothy Pedroni
+44 203 0369 635 [email protected]
Stephane Langlois
+44 203 0369 582 [email protected]
European Spec Sales
Gaelle Jarrousse Banks +44 203 0369 530 [email protected]
Carlo Pirri Banks +44 203 0369 531 [email protected]
Gert-Jaap Kraan Insurance +44 203 0369 510 [email protected]
Mediobanca S.p.A.
Dominic Bidwell
Head of Equity Trading and Sales Trading
+44 203 0369 627
[email protected]
SALES/TRADERS
Alessandro Gobbi
+39 02 8829 263 [email protected]
Matteo Agrati
+44 203 0369 629 [email protected]
Michael Sherry
+44 203 0369 605 [email protected]
Roberto Riboldi +39 02 8829 639 [email protected]
FOR US PERSON receiving this document and wishing to effect transactions in any securities discussed herein, please contact:
Mediobanca Securities USA LLC
Pierluigi Gastone
Head of Mediobanca Securities USA LLC
+1 212 991 4745
[email protected]
Massimiliano Pula
+1 646 839 4911 [email protected]
Robert Perez
+1 646 839 4910 [email protected]
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