BBVA's Tactical Growth And Efficiency Cast Light Amid Potential Risks From Currency And Regulatory Challenges

Key Takeaways

• Strategic expansion in Spain and Mexico with strong loan growth in key segments supports future revenue growth and healthier net margins.
  
• Effective interest rate and currency risk management stabilizes net interest margins, ensuring consistent earnings and reducing revenue fluctuations.
  
• Currency depreciation and increased risk in key markets like Turkey and Mexico threaten BBVA’s net margins and overall profitability amidst regulatory challenges.

Catalysts

Provides retail banking, wholesale banking, and asset management services in the United States, Spain, Mexico, Turkey, South America, and internationally.

• BBVA's strategic expansion in core markets like Spain and Mexico, with strong loan growth in profitable segments such as consumer credit and SMEs, indicates promising future revenue growth. Improvements in loan growth across these segments should support healthier net margins and overall profitability.
  
• Proactive management of interest rate risks and currency volatility through hedging strategies helps stabilize net interest margins (NIMs) despite declining spreads, ensuring consistent earnings growth and reducing potential fluctuations in revenue and profitability.
  
• Continued significant growth in net fees and commissions, particularly from payments and asset management businesses, suggests an expanding revenue base with higher-margin income that supports improved net margins and earnings growth.
  
• Positive efficiency improvements, as reflected in their industry-leading efficiency ratio, demonstrate BBVA's ability to manage operating costs effectively, which should contribute to enhanced net margins and return on tangible equity.
  
• Strategic initiatives in sustainability and digital customer acquisition imply a forward-looking approach to capture new revenue streams and customer bases, potentially increasing both revenue and customer satisfaction, and supporting elevated earnings growth.

Banco Bilbao Vizcaya Argentaria Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco Bilbao Vizcaya Argentaria's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.3% today to 24.6% in 3 years time.
• Analysts expect earnings to reach €8.3 billion (and earnings per share of €1.45) by about November 2027, down from €9.3 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €9.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2027 earnings, up from 5.8x today. This future PE is lower than the current PE for the US Banks industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.43%, as per the Simply Wall St company report.

Banco Bilbao Vizcaya Argentaria Future Earnings Per Share Growth

Risks

• The significant depreciation of currencies in BBVA's footprint could negatively impact revenues and net margins, particularly if the bank can no longer compensate through operational performance.
  
• The cost of risk in Turkey is increasing, putting pressure on net margins and earnings. If inflation and interest rates do not normalize as expected, this pressure could intensify.
  
• Mexico's economic outlook includes slower GDP growth and potential ratings downgrades, which could elevate the cost of risk and affect net margins adversely.
  
• Significant asset quality or cost-of-risk challenges in Argentina and Turkey may persist, affecting net margins and earnings.
  
• Regulatory changes, such as the banking levy in Spain, could introduce additional costs, impacting net margins and overall profitability.

Valuation

• The analysts have a consensus price target of €11.41 for Banco Bilbao Vizcaya Argentaria based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €13.0, and the most bearish reporting a price target of just €9.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €33.9 billion, earnings will come to €8.3 billion, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of €9.34, the analyst's price target of €11.41 is 18.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.