Digitalization And Sustainable Finance Will Forge New Banking Horizons

Key Takeaways

• Strong loan growth in key markets and improved capital position are boosting profitability and offering growth opportunities.
  
• Expanding digital customer base and focus on sustainability are driving revenue growth and enhancing market position.
  
• Infrastructure vulnerabilities, currency risks, tax changes, and economic issues in Spain, Mexico, and Turkey pose significant challenges to BBVA's revenue and net margins.

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.

• Strong loan growth in key markets like Mexico and Spain, driven by increased lending to enterprises and consumer credit, is expected to enhance net interest income and profitability.
  
• BBVA's robust capital position, as demonstrated by improvements in the CET1 ratio, provides a solid foundation for future growth opportunities and potential capital optimization, impacting earnings positively.
  
• The expanding customer base, with a record acquisition of 2.9 million new clients, particularly through digital channels, is expected to drive revenue growth and improve efficiency through digitalization.
  
• The bank's focus on sustainability, with a goal to channel €700 billion between 2025 and 2029 towards sustainable finance, is anticipated to drive revenue and enhance BBVA's market position.
  
• Improved asset quality metrics, with a decline in non-performing loans (NPL) and cost of risk, suggest potential for improved net margins and earnings stability moving forward.

Banco Bilbao Vizcaya Argentaria Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco Bilbao Vizcaya Argentaria's revenue will grow by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 31.1% today to 26.0% in 3 years time.
• Analysts expect earnings to reach €10.0 billion (and earnings per share of €1.84) by about May 2028, down from €10.2 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €8.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.3x on those 2028 earnings, up from 6.8x today. This future PE is greater than the current PE for the US Banks industry at 8.1x.
• Analysts expect the number of shares outstanding to decline by 1.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

Banco Bilbao Vizcaya Argentaria Future Earnings Per Share Growth

Risks

• The recent significant power shortage in Spain highlights infrastructure vulnerabilities that could pose risks to the company’s operations and indirectly affect revenues, particularly if such occurrences become frequent.
  
• Currency depreciations have negatively impacted the tangible book value growth, suggesting potential risks in the bank’s earnings due to foreign exchange volatility, especially from regions like Mexico and Turkey.
  
• The implementation of a new banking tax structure in Spain, which has shifted from other income impacts to income tax headings, could affect net margins and may present a challenge if the tax burden increases or if similar taxes are introduced in other regions.
  
• Economic and political uncertainties, including trade tensions, in Mexico could impact credit growth and cost of risk, affecting both revenue and net margins adversely if the predicted growth slows or defaults increase.
  
• Turkey's economic situation, with expectations of higher inflation and interest rates, coupled with potential currency devaluation, presents significant risks that could lower the expected net profit, impacting the bank's overall earnings negatively.

Valuation

• The analysts have a consensus price target of €13.373 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 €15.0, and the most bearish reporting a price target of just €10.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €38.3 billion, earnings will come to €10.0 billion, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of €12.06, the analyst price target of €13.37 is 9.8% higher.
  
• 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.