Sabadell And Bankia Accumulate A Drop Of 73.7% And 57.5% In 2020. Is A Merger Looming?

Bankinter | The Ibex 35 plunged 2.51% on Tuesday by (vs a 0.32 % decline on the EuroStoxx 50) with falls of 9.4% from Telefónica and ACS, a 7.6% drop by Mediaset, a 6.7% slump from Ence.In this chain of declines, the reaction of Sabadell (down 11.87%) and Bankia (down 11.13%) – the largest falls in the Ibex on that day – is striking. They doubled the falls in the rest of the banks (5.5% for Santander, 4.5% for BBVA, 4.0% for Caixabank…) versus a decline of 2.6% in the EuroStoxx Banks. The macroeconomic environment does not support this, the low rate scenario is prolonged and Covid19 is leading to a significant increase in provisions.

Sabadell and Bankia will fall by 73.7% and 57.5%, respectively, in 2020, amongst the biggest drops in the European banking sector (a decline of 46.4% for the EuroStoxx Banks). So is a merger looming between these two Spanish lenders? The market has been speculating about this possibility for some time, even as a mechanism to dilute the state’s position in Bankia (currently at 61.8%) which it holds via the FROB.

Does it make strategic sense? In principle yes. It would increase diversification by business lines (Sabadell is strong in SMEs and Bankia in mortgages) and geographically (Madrid, Valencia, Balearic Islands in the case of Bankia, while Sabadell would contribute with Catalonia, Levante).

Does it make financial sense? It depends on the price -Bankia’s market capitalisation is 1.6 times that of Sabadell’s-, the cost synergies (20/40%?), the financing of the operation (capital increase?) and the management team in charge.

We think that a hypothetical merger would be (a): a defensive move aimed at cutting costs, increasing size and optimizing capital consumption; (b) but not an incentive for shareholders, at least until the definitive impact of Covid19 on provisions and capital is known (2021?).

The profitability (ROTE) of both institutions is low (close to 3% for Bankia and around 2.3% for Sabadell in Q1’20),while the size of the balance sheet is similar (around 208.468 billion euros for Bankia and about 223.753 billion for Sabadell, including the UK). Sabadell has a lower NPL ratio (3.8% in Q1’20 vs 4.9% for Bankia), but Bankia (CET1 12.95%) exceeds Sabadell (CET1 12.1% pro-forma) in terms of solvency.