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(Bloomberg Opinion) -- Shareholders in Banco de Sabadell SA pondering the takeover offer from Spanish rival Banco Bilbao Vizcaya Argentaria SA shouldn’t think too hard. Just say “Yes!”
Sure, their stock has been on a long, steady climb to respectability, but Sabadell has been lifted by the same rising tide that has buoyed other European lenders, especially those in the south. In March, Sabadell’s share price rose above 50% of forecast book value, up from a low point of little more than 10% when the two banks failed to agree on a deal in 2020.
Southern European banks have outperformed their northern peers over the past two quarters because their revenue has been helped by loans that are typically priced off of short-term interest rates and national government bond yields that are higher. Once the European Central Bank finally starts to cut interest rates, these advantages will likely fade.
In other words, the BBVA offer could be the best Sabadell shareholders are going to see for a long time. BBVA outlined the terms of a deal on Wednesday in a letter to Sabadell’s board. The opening bid is one BBVA share for every 4.83 of Sabadell’s. Over the past six months, that works out as a premium to the target’s shares of just under 30% at the lowest to more than 70% at the peak in February. Sabadell stock rallied hard in the days before and since the deal talks broke — it’s doubled over the past year — which has cut the premium to about 9% at Thursday’s close. But the bid still values Sabadell stock at nearly 80% of forecast book value, a level it hasn’t seen in nearly a decade.
Spanish and Italian banks have been boosted by revenue from lending that turned out higher than investors expected, while bad loans have remained low. Banco Santander SA and BBVA both healthily beat first-quarter earnings expectations this week, driven by strong results in Spain. Intesa Sanpaolo SpA and UniCredit SpA could continue the trend when they report in coming days. German and French banks haven’t performed so strongly.
In Spain and Italy, the interest rates on mortgages and many other loans are linked to three-month interest rates and repriced regularly. That means rising ECB rates quickly fed through into stronger revenue – and with the central bank proving slower to cut again than had been expected late last year and early this year, those higher revenues have remained.
German, French and Dutch banks, meanwhile, tend to have a lot more long-term fixed-rate mortgages, which are slower to reap the benefits of higher rates, but will keep earning them for longer once they do. The problem, however, is that longer term rates in those countries have stayed low and so not even new loans are lifting income much.
Northern European government bond curves are signaling recession: 10-year yields are lower than two-year and three-month ones. In the South, the curves are in healthier, positive territory. This hands Spanish and Italian lenders another advantage: Banks invest spare deposits in domestic government debt, so the southerners can generate better revenue from that too.
The ECB may not be expected to reduce rates this year by as much as it was three or four months ago, but it is still expected to cut. Once it does, southern banks will start to see lending income falling once more, at least in their home markets. For Sabadell, which does more than two-thirds of its lending in Spain, that’ll mean pressure on profits.
For BBVA, a deal for Sabadell would rebalance its business back toward Spain. That might seem like bad timing, but some analysts and investors think BBVA is over-exposed to emerging markets. Sabadell would reduce the contribution of Mexico, Turkey and other South American countries to BBVA’s earnings from about 77% to 66%, according to Inigo Vega, analyst at Jefferies. That still leaves it with a lot of profit coming from the US-influenced Mexican market, by far the biggest of its emerging-economy exposures.
That’s another reason for Sabadell shareholders to like the deal — it’ll diversify their earnings exposure. The two lenders combined would also leapfrog Santander to become the second-biggest bank in Spain (after CaixaBank SA) with nearly 17% of deposits and 18% of loans, according to company filings and Bank of Spain statistics. That could offer the enlarged BBVA a little more pricing power at home, too.
Sabadell stock has had a great run — just like Spanish banking broadly. The interest rate cuts to come mean changing times for both.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. Previously, he was a reporter for the Wall Street Journal and the Financial Times.
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