BBVA-SAB: EPS Hit With Maintained Payout; Spread Negative

BBVA – Sabadell (SABSM: BBB+ pos); financial details appearing. CET1 hit by 30bp and EPS by 1-2%, we estimate whilst maintaining equity payout policy – this is a spread negative, even aside from the mechanistic blending of the balance sheets and ratings, in our view.

• BBVA’s (BBVASM: A3/A/A-) current CET1 capital ratio is 12.8%, mgmt estimates are for a 30bp hit to CET1 at the time of the merger and there is a commitment to maintain “BBVA's attractive shareholder distributions’ policy”. This appears to be a spread negative, in our view.
• Cost savings are targeted at EUR850m, 28% of SAB’s last-reported cost base. Anything above 40% of target cost base is generally seen as overly-aggressive, even with in-market deals, we feel, so this passes the “sniff test”.
• EPS is set to be 3% higher once merger savings are realised (can often take 3yrs or more). BBVA is using paper rated 7.1x (FY24E P/E) to buy SAB at 8.3x (based on 30-Apr close) hence the upfront EPS hit, recouped by cost savings over time (in theory). It’s this upfront hit to EPS (which looks to be around 1-2%, we estimate) whilst committing to retain equity payout levels, which also drives our widening view.
• Tangible book is reported to rise 1% on deal completion – using the same logic as EPS, BBVA is using paper rated at 1.0x (FY24E P/TBV) to buy SAB at 0.8x, hence the accretion.