Digital Banking Shifts And Spain Demographics Will Erode Profit Margins

Key Takeaways

• Digital disruption and aggressive competition threaten Unicaja's revenues and margins, exposing weaknesses in technological innovation and customer retention.
  
• Structural and demographic challenges in core regions constrain loan demand and deposit growth, hampering long-term profitability and earnings expansion.
  
• Robust business growth, improved asset quality, strong capital, digital transformation, and strategic execution are driving higher profitability and supporting ongoing earnings and shareholder returns.

Catalysts

Engages in the retail banking business in Spain.

• As digital banking adoption accelerates and nimble fintechs continue to capture market share for payments, lending, and savings products, Unicaja Banco faces mounting pressures on fee income and customer retention; over the long term, this digital erosion threatens both revenues and net margins, especially given Unicaja's mixed record on technological innovation and digital transformation.
  
• The demographic decline and aging population in Unicaja's core Spanish regions will gradually shrink the potential customer base, disproportionately impacting demand for new loans, slowing deposit growth, and ultimately suppressing both topline revenue expansion and sustainable net interest income.
  
• With a high concentration in economically stagnant or low-growth regions of Spain, Unicaja remains structurally exposed to long-term underperformance in loan demand and persistent margin pressure, limiting its ability to deliver meaningful earnings growth even as short-term business volumes stabilize.
  
• Sustained low or volatile interest rates across Europe, combined with ongoing repricing of existing loan books to lower yields, will undermine net interest margins through 2026 and beyond, restricting profitability as reductions in funding costs become exhausted and downside risk grows for core earnings.
  
• Increasing competition from challenger banks, big tech, and tightening regulatory requirements will drive operational costs higher while compressing revenues, leading to long-term efficiency ratio deterioration and a drag on net profits, as Unicaja is forced to invest more simply to maintain its current market share.

Unicaja Banco Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Unicaja Banco compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Unicaja Banco's revenue will decrease by 2.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 30.6% today to 20.2% in 3 years time.
• The bearish analysts expect earnings to reach €367.4 million (and earnings per share of €0.16) by about August 2028, down 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 bearish analyst cohort, the company would need to trade at a PE ratio of 13.9x on those 2028 earnings, up from 10.0x today. This future PE is greater than the current PE for the GB Banks industry at 9.7x.
• 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 9.44%, as per the Simply Wall St company report.

Unicaja Banco Future Earnings Per Share Growth

Risks

• The company is reporting strong underlying business momentum, with business volumes increasing by 4% year-over-year and mutual fund growth above 25%, indicating rising customer engagement and expanding revenue opportunities that can support higher profits and share price appreciation.
  
• Asset quality has improved significantly, as nonperforming assets and foreclosed assets have been reduced by over 25% in the past year and NPL coverage ratios have climbed to 74%, decreasing risk of future credit losses and supporting stronger net margins and net income.
  
• The bank's capital and liquidity positions are very strong, as reflected by a CET1 fully loaded ratio of 15.8% and a loan-to-deposit ratio of 70%, providing a considerable buffer for future stress and enabling growth in lending and investment that can lift earnings per share.
  
• Unicaja is achieving notable progress in digital transformation and fee-based businesses, with value-added fees (driven by insurance and mutual funds) rising by 12%, supporting sustainable revenue diversification and improvement in the efficiency ratio, both of which contribute positively to profitability.
  
• The execution of the strategic plan-including cost discipline, investments in AI and operational simplification, partnerships with premier asset managers, and organic growth in new lending-has resulted in a 14.6% growth in net profit and double-digit increases in dividends, creating clear potential for ongoing earnings growth and enhanced shareholder returns.

Valuation

• The assumed bearish price target for Unicaja Banco is €1.6, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be €1.8 billion, earnings will come to €367.4 million, and it would be trading on a PE ratio of 13.9x, assuming you use a discount rate of 9.4%.
  
• Given the current share price of €2.38, the bearish analyst price target of €1.6 is 48.6% lower.
  
• 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.