Santander Corporate & Investment | On Tuesday, Fitch revised its outlook for BBVA (BBVA) (A3 p, A e, A- p) to positive and confirmed all its ratings, including its senior preferred (SP) rating of A-. Fitch indicated that the positive outlook reflects its expectation that ‘BBVA’s solid franchise and business model will enable the group to generate stronger financial results thanks to improved operating conditions in some of BBVA’s key markets, particularly Spain, which could lead to an upgrade of the rating’.
The revised outlook also takes into account the rating agency’s expectation that ‘recurring profits will remain strong and that BBVA’s risk management framework will continue to be effective in controlling risks in more volatile regions’. BBVA’s revised outlook now incorporates rating sensitivities that make an upgrade ‘likely if it can demonstrate the ability to generate good business volumes and strong risk-adjusted operating profitability’.
Fitch specifically indicated that the rating could be upgraded if the bank sustainably maintains ‘an operating profit of over 3% of risk-weighted assets, with positive contributions from key regions’ and that ‘this would have to be accompanied by effective and continuous risk control and stable asset quality, while maintaining a CET1 ratio of at least 12%’. Fitch added that ‘the potential increase could also come from the realisation of the benefits of a possible merger with Banco de Sabadell, S.A., in particular from an expanded national franchise, especially in the SME segment, potential synergies and a greater geographical presence in developed markets’. The Fitch outlook report also states that ‘any upgrade in the rating would be subject to the bank maintaining a solid solvency and continuing to benefit from its good franchise, as well as the execution risks being manageable’.
In its report, Fitch explained that the key factors for BBVA’s rating continue to be the great strength of the bank’s franchise throughout various economic and interest rate cycles, including ‘robust franchises in Spain, Mexico and Turkey, which support business growth, revenue diversification and a solid financing profile’; its ‘significant exposure to emerging markets’ with risks arising from ‘significant exposure to more volatile economies’ that are ‘mitigated by its good track record in managing risk during periods of high volatility and its preferred multiple point of entry (MPE) resolution strategy’; a ‘retail approach that favours asset quality’, which the rating agency considers resilient, with expectations that the ratio of bad loans will remain at around 3.5% in 2025; solid and improving profits, as it estimates that operating profit has peaked at 3.9% of risk-weighted assets (RWA) in 2024, and that ’ the ratio will stabilise at slightly above 3.5% in 2025-2026, which compares favourably with European peers’; adequate solvency, with the expectation that BBVA ’will gradually steer its CET1 ratio (12.9% at the end of 2024) towards the upper end of its target of 11.5%-12%, which is still lower than that of most of its European counterparts, in the medium term through new capital distributions, organic growth and possible corporate transactions’; and a robust funding profile favoured by “strong local deposit franchises in its main retail and commercial activities, which provide it with strong pricing power”, as well as diversified funding with ‘strong access to a broad investor base through diversified sources of wholesale funding’.
Research team’s opinion: The trends behind Fitch’s revised outlook for BBVA and the factors with the most weight in its ratings are in line with the arguments underpinning our Neutral recommendation on the bank. Our recommendation takes into account our view that the bank’s superior profitability (in particular, its operational efficiency) and the benefits of its well-targeted strategy constitute a relative credit strength to face some of the challenges of the economic and operational environment in some of its main markets.
It also includes our view that BBVA’s relatively strong credit risk profile and strict asset quality management are likely to continue to help the bank weather the ongoing, albeit moderate, signs of deterioration in asset quality, which are partly due to BBVA’s sustained expansion in some higher-risk segments and to certain pressures in the operating environment of some of the regions in which it operates. Our recommendation also incorporates the bank’s solid funding profile – most divisions have loan-to-deposit ratios below 100% or very close to that level – and the group’s liquid balance sheet. In our recommendation we also weigh up our opinion that BBVA’s risk-adjusted core solvency remains low despite the improvement in recent quarters. Following the bank’s more aggressive capital management in recent years, since the sale of its US operations, and in line with the bank’s stated policy of returning to shareholders what it considers to be surplus capital over its target range for CET1 FL of 11.5-12%, in our analysis we assume that the bank will continue to manage its capital in a conservative manner. In line with the bank’s stated policy of returning to shareholders what it considers to be surplus capital over its target range for CET1 FL of 11.5-12%, in our analysis we assume that BBVA will continue to operate with relatively tight solvency levels compared to most of its European peers.
Our Neutral recommendation also takes into account our view that, in general terms, BBVA’s bond prices reasonably reflect the bank’s balanced credit risk profile. Our recommendation also takes into account our opinion, which has not changed, on the possible effects of BBVA’s takeover bid for Sabadell, based on the premise that the conditions of the operation remain unchanged and that the evolution of the fundamentals of both banks remains in line with our expectations.
