Strong Mutual Fund Growth And Stable Deposit Costs Will Boost Net Interest Margins

Key Takeaways

• Strong mutual fund growth boosts asset management revenue, alongside stable deposit costs improving potential net interest margins for Unicaja Banco.
  
• Enhanced asset quality, robust capital position, and focus on corporate loans support profitability, potential buybacks, and net interest income growth.
  
• Reliance on low deposit costs and high fixed-rate loans, alongside regulatory risks, could constrain revenue growth and impact net margins.

Catalysts

Engages in retail banking business in Spain.

• Unicaja Banco is experiencing strong growth in customer funds, especially in off-balance sheet mutual funds which have grown almost 7% year-on-year. Increased mutual fund activity should boost revenue from asset management fees as it represents a significant portion of Unicaja's income.
  
• The bank's ability to maintain a stable cost of deposits while increasing customer deposits suggests potential for improved net interest margins, especially if interest rates stabilize or decrease, enhancing earnings.
  
• Enhancements in asset quality, marked by falling NPL balances and higher NPAs coverage ratios, could reduce future provision expenses, positively impacting net margins and overall profitability.
  
• Continued strong capital position with a CET1 ratio of 15.4% and ongoing capital generation could enable potential future buybacks, enhancing earnings per share and supporting stock value.
  
• Unicaja's focus on increasing corporate loan production, coupled with strategic improvements in client engagement and relationship, may increase loan yields and support growth in net interest income.

Unicaja Banco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Unicaja Banco's revenue will grow by 5.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.5% today to 24.1% in 3 years time.
• Analysts expect earnings to reach €453.7 million (and earnings per share of €0.17) by about January 2028, up from €425.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €504.7 million in earnings, and the most bearish expecting €386 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 7.6x today. This future PE is lower than the current PE for the GB Banks industry at 12.4x.
• Analysts expect the number of shares outstanding to grow by 1.39% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.8%, as per the Simply Wall St company report.

Unicaja Banco Future Earnings Per Share Growth

Risks

• Performing loans have decreased, with private sector loans remaining flat, which can negatively impact future revenue growth and limit the bank's earning potential.
  
• Unicaja Banco's net interest income (NII) relies heavily on sustaining low deposit costs, which may not be feasible long-term and could affect net margins if deposit costs rise unexpectedly.
  
• The bank's guidance includes a decrease in fees due to strategy changes, which may contribute to lower revenue if the expected boost in customer loyalty does not materialize.
  
• Provisions related to Spanish banking levies and legal claims indicate ongoing regulatory and operational risks that could affect net margins and lead to unexpected expenses.
  
• The high level of fixed-rate loans, compared to variable-rate, could limit potential benefits from rising interest rates on earnings, particularly if broader economic conditions fluctuate.

Valuation

• The analysts have a consensus price target of €1.45 for Unicaja Banco 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 €2.2, and the most bearish reporting a price target of just €1.17.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.9 billion, earnings will come to €453.7 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 8.8%.
• Given the current share price of €1.27, the analyst's price target of €1.45 is 11.9% 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.