Overweight Sabadell (O.P. 1.35 eur): Greater visibility in both profits and capital

SabadellSabadell would have bought back 20% of back office arm

Morgan Stanley | Alvaro Serrano upgrades his recommendation for Banco Sabadell (SAB) to Overweight and the objective price from 1.10 to 2.35 euros. Sabadell has performed 10% worse than the sector YTD and Alvaro thinks that there is greater visibility in both profits and capital, which should provoke an increase in value.

He raises profit estimates for 2019-20 about +10% and increases estimates of CET1. In his estimates, Sabadell is trading at 7.5X P/E (compared to the sector at 10X) and at 0.6X PYBV. Alvaro estimates a ROTE of 8%, which in a bull case would be 10% compared to the company´s guidance of 12% for 2021. Various key points:

• Financing: its financing costs have improved significantly, it has just issued a non-preferred senior bond at 175 bp compared to the 200 bp we had assumed. In addition the risk of its bond portfolio has reduced.

• TSB: following the problems it had last year implementing its IT system (it lost 240 million euros), the business profile is improving. Although the operation is still complicated and the margins remain under pressure, cost cutting will allow it to maintain the bank´s profitability. The new CEO will present a new short term plan, which could include aggressive cost cutting initiatives. In the model the assumptions are low (ROE 2% 2021)

• Capital: CET1 is at 11% and MS expects +60% capital creation this year (new target 11.6% compared to previous 11.1%).

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