Loan Growth And Asset Quality Will Likely Weaken Iberian Bank Outlook

Catalysts

About CaixaBank

CaixaBank is a large Iberian banking group focused on retail and commercial banking, wealth management, insurance and corporate banking in Spain and Portugal.

What are the underlying business or industry changes driving this perspective?

• The current outperformance in loan growth versus the wider market, including 5% loan book growth and double digit consumer lending growth, could be hard to repeat if Spanish and Portuguese GDP growth normalises from current levels. This would pressure future revenue expansion and make it harder to sustain a circa 17% return on tangible equity.
• Heavy reliance on Iberian economic strength, including investment growth of 7.6% and services exports near 10%, increases exposure to a regional slowdown or investment pause. This could soften business lending volumes and weigh on customer spread and NII growth.
• Ongoing share buybacks, with a seventh €500m program already deducted from CET1, and an interim dividend payout near 60% of earnings, may limit future capital flexibility if risk weighted assets continue to rise from higher lending. This could potentially constrain earnings growth per share if the cycle weakens.
• The shift toward more fixed rate mortgages and larger ALCO and hedge positions, including an extra €2.6b of bonds and €5b of new hedges this quarter, raises interest rate management complexity. Any less favourable future reinvestment conditions could cap NII and net margin resilience once current repricing tailwinds fade.
• Very low current cost of risk, guided to less than 25 basis points with NPL ratio at 2.27% and coverage at 72%, leaves limited room for credit metrics to improve further. Any turn in the credit cycle from current record asset quality levels could push up provisions and weigh on earnings growth.

Assumptions

This narrative explores a more pessimistic perspective on CaixaBank compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming CaixaBank's revenue will grow by 5.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 37.7% today to 35.1% in 3 years time.
• The bearish analysts expect earnings to reach €6.1 billion (and earnings per share of €0.96) by about January 2029, up from €5.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €7.4 billion.
• 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 10.5x on those 2029 earnings, down from 13.4x today. This future PE is lower than the current PE for the GB Banks industry at 12.0x.
• The bearish analysts expect the number of shares outstanding to decline by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.21%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The bank is adding almost 400,000 net new clients in Spain and gaining market share in areas like payroll deposits, consumer lending, SMEs and wealth management. If this wider and deeper client franchise is sustained it could support long term revenue and fee income more than a bearish view assumes, with a supportive effect on earnings.
• Management is investing heavily in technology, including AI, digital channels and the imagin digital bank, with early signs of strong client adoption. If these efforts lower cost to serve while keeping similar product margins, long term operating costs could grow more slowly than expected, supporting net margins and earnings.
• The Iberian economies are currently outperforming, with Spain’s GDP estimates raised, investment growth of 7.6%, private consumption growth of 3.3% and strong services exports. If this resilient backdrop persists it could underpin loan demand and asset quality, supporting revenue and limiting pressure on provisions and earnings.
• CaixaBank’s asset quality metrics such as an NPL ratio of 2.27%, coverage of 72% and cost of risk guided to less than 25 basis points are currently strong. If this benign credit picture extends for longer than expected it could keep provision charges low, supporting net margins and earnings.
• Repeated share buybacks of €500m tranches and a dividend payout around 60% are being executed while CET1 remains at 12.44% above internal targets. If capital generation continues to fund both growth and distributions, earnings per share could be supported by a shrinking share count, partly offsetting any pressure on the share price that a bearish thesis anticipates.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for CaixaBank is €7.54, which represents up to two standard deviations below the consensus price target of €10.1. This valuation is based on what can be assumed as the expectations of CaixaBank'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 €12.5, and the most bearish reporting a price target of just €6.8.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €17.5 billion, earnings will come to €6.1 billion, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of €10.8, the analyst price target of €7.54 is 43.4% lower. Despite analysts expecting the underlying business 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.