Digitalization And Economic Convergence In Southern Europe Will Expand Opportunities

Key Takeaways

• Strategic focus on under-banked regions, digitalization, and tailored offerings is set to drive outsized growth in lending, deposits, and recurring fee revenue.
  
• Operational streamlining, improved asset quality, and scale from the Liberbank merger position Unicaja for structurally higher margins and sustained, rising dividends.
  
• Lagging digital transformation, regional concentration, credit risk exposure, and regulatory costs threaten Unicaja Banco's growth, margins, and long-term profitability amidst shifting banking industry trends.

Catalysts

Engages in the retail banking business in Spain.

• Analyst consensus highlights strong lending growth, but current business momentum and demand in under-banked regions, coupled with double-digit growth in mutual fund balances and assets under management, points to an even faster acceleration in recurring income and fee revenue than currently forecast, with earnings upgrades likely as these trends compound.
  
• While consensus recognizes improving asset quality and reduced NPAs, the rapid decline in non-performing assets-halved in two years with NPL coverage now above 70%-alongside robust internal capital generation and an ultra-low cost of risk below 30 basis points, sets Unicaja up for structurally higher net margins and sustainably growing dividends that could surprise to the upside.
  
• The scale benefits from the Liberbank merger and aggressive management simplification-including a reduction in product catalog by 80%, strategic outsourcing agreements, and adoption of generative AI-are not yet fully priced into expectations, and are likely to drive meaningful long-term improvements in the cost-to-income ratio and operational leverage.
  
• Unicaja's focused strategy in less-banked rural Spanish regions amidst accelerating infrastructure investment and economic development in Andalusia and Castilla y León positions it to capture outsized loan and deposit growth, especially as demand for SME and household banking services rises, underpinning top-line expansion.
  
• Investments in digital channels, ecosystem partnerships (including fintechs and leading asset managers), and tailored products for an aging population will enable Unicaja to capitalize on structural market changes, raising customer retention, boosting cross-selling of wealth and retirement products, and unlocking new fee income streams that fuel durable growth in revenues and profitability.

Unicaja Banco Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Unicaja Banco compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Unicaja Banco's revenue will grow by 3.2% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 30.6% today to 28.0% in 3 years time.
• The bullish analysts expect earnings to reach €612.6 million (and earnings per share of €0.25) by about August 2028, up from €609.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, up from 10.2x today. This future PE is greater than the current PE for the GB Banks industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 1.85% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.37%, as per the Simply Wall St company report.

Unicaja Banco Future Earnings Per Share Growth

Risks

• The ongoing shift toward digital banking and rapid growth of digital-only and non-bank competitors could erode Unicaja Banco's customer base and fee income, especially as the company's efforts to modernize operations and its digital product suite may lag behind fast-moving competitors, contributing to declining revenues and compressed net margins in the long run.
  
• Concentration in the slow-growth regions of Andalusia and similar areas exposes Unicaja Banco to the demographic headwinds of an aging and shrinking population, leading to muted loan demand and stagnant long-term revenue growth, particularly as the loan book remains largely undiversified.
  
• Persistent industry-wide pressure from low or volatile interest rates, combined with Unicaja's own guidance that net interest income and margins will likely stagnate or even decline slightly over the next few quarters, highlights ongoing structural challenges to profitability and raises the risk of margin compression through 2026, impacting net income growth.
  
• Despite recent improvements in asset quality and reduction of non-performing assets, Unicaja Banco retains elevated exposure to real estate and SME lending, segments historically vulnerable to downturns, which could increase future credit risk and force higher loan loss provisions, thereby negatively affecting earnings in adverse macroeconomic scenarios.
  
• Rising regulatory and capital requirements, as well as the cost of implementing new ESG standards and Basel IV rules, are likely to raise compliance and operational costs for Unicaja Banco, putting downward pressure on return on equity and operational leverage, especially as the bank continues to absorb post-merger integration costs and invests in new technology.

Valuation

• The assumed bullish price target for Unicaja Banco is €2.72, which represents two standard deviations above the consensus price target of €2.06. This valuation is based on what can be assumed as the expectations of Unicaja Banco's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €2.9, and the most bearish reporting a price target of just €1.6.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €2.2 billion, earnings will come to €612.6 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 9.4%.
• Given the current share price of €2.41, the bullish analyst price target of €2.72 is 11.1% 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.