""We believe that the wave of consolidation was sparked by the merger between CaixaBank and Bankia confirmed in September and reflects the need for banks to offset profitability pressures exacerbated by the coronavirus pandemic. Two other banks, Unicaja and Liberbank, confirmed renewed merger talks in October, which could lead to the creation of Spain's fifth largest bank by total assets", acording a FitchRating report just published.
It says: "A merger between BBVA (BBB+/Stable) and Banco de Sabadell (BBB-/Stable) would create Spain's second largest bank after the Caixa/Bankia merger, measured by domestic assets (close to EUR600 billion) and market share (just over 25% of deposits). This would result in a clear gap between the top three large national lenders and the rest of the market. The two banks have confirmed that they have initiated merger talks, while BBVA has also announced an agreement to sale its US bank subsidiary to The PNC Financial Services Group, Inc. (A+/Stable) for USD11.6 billion in cash (see Fitch Places BBVA USA on Watch Positive Following Announced Sale to PNC; SR Placed on Watch Negative).
BBVA's US sale will include over USD100 billion of assets (more than 10% of group total assets) but not BBVA Securities (its broker dealer) or its branch in New York, through which it will continue to provide corporate and investment banking services to institutional clients. The transaction will lead to a EUR580 million capital gain and increase BBVA's fully-loaded Common Equity Tier 1 ratio to 14.5% (from 11.5% at end-September 2020), largely through a reduction in risk-weighted assets. The deal is subject to regulatory approvals and is expected to close by mid-2021.
The US sale agreement follows a series of asset disposals by BBVA in recent years (including subsidiaries in Chile and Panama) to reshape its geographical footprint, partly to address the smaller scale of its franchises compared with those in its core markets, such as Spain and Mexico. The sale comes at a time of increased pressures from the pandemic, which contributed to a EUR2 billion goodwill impairment in 1Q20 on the US business at group level. This adds to BBVA's pre-crisis challenge to improve its US bank subsidiary's already weaker profitability than local peers. The sale will alter BBVA's geographical mix between developed and emerging markets, with the contribution of developed markets to group total assets decreasing to 60% from 70%.
The sale proceeds will increase BBVA's capital flexibility for shareholder remuneration and business growth opportunities. Merging with Sabadell would fit with BBVA's aspirations to grow in its core markets with scope to achieve cost and revenue synergies. This would support the group's earnings resilience in the aftermath of the coronavirus crisis and in a prolonged low-interest-rate environment.
Fitch is likely to wait until the terms of a potential merger deal and BBVA's excess capital deployment expectations are known before assessing whether to take rating actions on BBVA or Sabadell. The discussions between the two banks so far have concentrated on the form of the potential deal (merger) and on a non-disclosure agreement for the exchange of information for due diligence purposes.
If the merger does not proceed, we expect BBVA to revise its capital management strategy, in particular regarding how excess capital is deployed. However, it may wait for news of the ECB's stance on restrictions on shareholder remuneration for 2021, and for more clarity on post-pandemic recovery prospects in its main markets and alternative opportunities for growth."
Note: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.