Digital Disruption And Market Volatility Will Weaken Legacy Banking

Key Takeaways

• Intensifying fintech competition and open banking adoption threaten BBVA's customer base, fee income, and long-term profitability.
  
• Ongoing exposure to volatile emerging markets and growing regulatory pressures risk earnings stability and increase compliance costs.
  
• Diversified growth in key markets, efficiency gains, and proactive regulatory adaptation are expected to drive profitability, value creation, and stable, long-term shareholder returns.

Catalysts

Provides retail banking, wholesale banking, and asset management services primarily in Spain, Mexico, Turkey, South America, rest of Europe, the United States, and Asia.

• Accelerated digital disruption and the rapid rise of fintech challengers threaten to erode BBVA's traditional banking customer base, as new, agile entrants offer more attractive, lower-cost digital products. This secular shift is likely to pressure BBVA's long-term deposit and lending revenues as well as lead to compressed net interest margins.
  
• Persistent exposure to emerging market volatility, particularly in Turkey and Mexico, increases BBVA's vulnerability to unpredictable currency devaluations and deteriorating credit conditions, directly risking the stability of reported earnings and potentially leading to significant asset write-downs.
  
• Sustained low or negative interest rate environments across key European and Turkish markets are expected to continue suppressing BBVA's net interest margin for an extended period, structurally limiting the bank's ability to grow core earnings regardless of activity gains in other regions.
  
• Escalating regulatory and compliance burdens, including rising environmental, social, and governance (ESG) requirements, will drive up operating and compliance costs while simultaneously restricting BBVA's ability to finance key sectors, contributing to higher costs and reduced profitability.
  
• Ongoing industry-wide adoption of open banking and third-party platforms will intensify competitive pressures, increasing customer churn and reducing fee income, ultimately undermining BBVA's long-term earnings, operational efficiency, and return on equity.

Banco Bilbao Vizcaya Argentaria Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Banco Bilbao Vizcaya Argentaria compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Banco Bilbao Vizcaya Argentaria's revenue will grow by 6.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 32.2% today to 25.4% in 3 years time.
• The bearish analysts expect earnings to reach €9.6 billion (and earnings per share of €1.79) by about August 2028, down from €10.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, which is the same as it is today today. This future PE is lower than the current PE for the US Banks industry at 10.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.36%, as per the Simply Wall St company report.

Banco Bilbao Vizcaya Argentaria Future Earnings Per Share Growth

Risks

• Continued strong growth in lending volumes and customer acquisition, especially in key markets like Mexico and Spain, suggest robust revenue expansion and improved market share, which may support higher group revenues and earnings in coming years.
  
• Sustained efficiency improvements driven by cost control, productivity programs, and adoption of new technologies, including artificial intelligence, are expected to bring cost-to-income ratios down to around 35 percent group-wide by 2028, potentially boosting net margins.
  
• The company's focus on capital-light, fee-generating businesses such as asset management, insurance, and transactional banking could diversify revenue streams beyond traditional interest income, reducing earnings volatility and increasing profitability.
  
• The strategic plan forecasts mid-teens compounded annual growth of tangible book value per share including dividends, strong ROTE averaging 22 percent, and the generation of €36 billion in distributable capital to shareholders through 2028, all pointing to significant long-term value creation and potential for share price appreciation.
  
• BBVA's proactive adaptation to regulatory changes, including Basel IV adjustments and model simplifications approved by regulators, will reduce risk-weighted assets and improve CET1 ratios, supporting capital strength and enabling large-scale distributions and buybacks that are typically favorable for share prices.

Valuation

• The assumed bearish price target for Banco Bilbao Vizcaya Argentaria is €12.05, which represents two standard deviations below the consensus price target of €15.88. This valuation is based on what can be assumed as the expectations of Banco Bilbao Vizcaya Argentaria's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €18.0, and the most bearish reporting a price target of just €11.7.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €37.8 billion, earnings will come to €9.6 billion, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of €16.45, the bearish analyst price target of €12.05 is 36.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.