Banco Sabadell: there is life beyond TSB, Overweight (O.P. 1.56 eur)

Nuria Álvarez (Renta 4) | Banco Sabadell´s Q119 results showed how the increase in volumes had allowed it to moderate the deterioration in the margin of interests.

A performance affected by the increases cost of liabilities (both wholesale and retail), greater liquidity and regulatory impacts. Aside from TSB, Sabadell´s credit performance remained stable precisely thanks to the growth in credit, where it maintains a solid position in the large company and SME segments, and the increase in prices. A credit tendency which should continue in the next few quarters supporting the evolution in the margin of interests, which we expect to grow +1% in 2019.

Difficult to achieve 2018-20 Strategic Plan

2019 will be a transition year after a 2018 marked by extraordinary costs and provisions. The 2018-20 Strategic Plan´s targets will be hard to meet in a deteriorating macroeconomic climate and various hypotheses remote from reality, which is why the bank has revised its 2019 targets. Now it expects the group´s margin of interests to grow between +1 and +2% (vs -0.2% yoy R4e) and high single digit in net commissions in line with 2018 (+9% in Q119, vs +6% yoy R4e). Generation of Results of Financial Operations between 80-100 Mn€ (vs 67 Mn€ in Q119), to situate the efficiency ratio (without amortisations) close to the level of 55% (vs 54% R4e) and a cost of risk of 0.45% (vs 0.51% in Q119).

We come to an objective price of 1.56€/share. Overweight.

With TSB in a recuperation phase, it should begin to reflected in the expected growth in Spain, as with the advances in the sale of housing assets and the improvement in the risk profile. We consider that the multiples at which the shares are trading, P/Book Value 19 0,4x R4e y PER 19 6,1x R4e x, capture the principle short and medium term risks: evolution of Brexit where the risk of hard exit has increases and the sentence over the reference index for mortgages. The capacity for the organic generation of capital already demonstrated, as well as meeting the requirements and the improvement in capital ratios are aspects we think not reflected in the share value. This, together with the recovery of business in Spain and the operations to sanitise the book, lead us to the Overweight recommendation.