Banco de Sabadell: Trading at 5x Earnings and 50% Discount to TBV (OTCMKTS:BNDSF)

introduce

Banco de Sabadell (OTCPK:BNDSF) (OTCPK:BNDSY) is a relatively small Spanish bank with assets of less than 25 trillion euros and a market capitalization of just under 6B EUR. As a bank primarily focused on Spain (it also has a €40B mortgage portfolio in the UK with an LTV ratio as low as 55%), it may not be as attractive as Santander or BBVA, which also have exposure to others The market offers good exposure, but Sabadell can and should be viewed as a call option on the health of the Spanish economy. Trading at just 5x earnings and a nearly 50% discount to its tangible book value, I think the stock is once again too cheap to ignore.I say “again” because the stock price is still more than three times higher than It was trading at 31 cents when the last article was published. The total return in the past three years is approximately 270%. But as I’ll explain in this article, that still doesn’t mean the stock is expensive.

I recommend trading with Banco Sabadell exclusively through the Madrid Stock Exchange to take advantage of the superior liquidity. Spain’s stock code is SAB, and the current share price is 1.08 euros (as of Wednesday’s close). Keep in mind that there are currently 5.6B shares outstanding, with a market cap of €5.9B.

Unfortunately, the website mainly contains “download only” links, but you can find all relevant information and documentation here.

Net interest income continues to expand

Banco Sabadell’s financial results were primarily driven by net interest income. As shown in the chart below, net interest income continues to grow. Looking at the Spanish operations (left side of the table below, excluding contributions from TSB, Sabadell’s UK operations), we see continued growth in net interest income, with net interest income rising 9.2% sequentially in Q2 2023 after NII growth of 9.2% sequentially. Interest income was nearly 60% higher than last year’s second quarter.

Including the UK business, the differential is also quite good, but definitely less blunt, as UK net interest income was relatively flat. While net interest income increased by €70 million quarter-on-quarter, this was entirely attributable to operations outside the UK. As shown below, UK net interest income stagnated, but net attributable income increased due to lower provisions and impairment charges. This brings the attributable net profit in the first half of 2023 to 106 million euros, almost double the first half of 2023 performance. The strong results were driven by higher net interest income (which was certainly up significantly year-over-year and just stagnated slightly over the past few quarters) and lower loan loss provisions. It will be interesting to see if the low levels of loan loss provisions continue as they were last year, and we did see an acceleration in the second half of the year.

Returning to the consolidated financial results, Banco Sabadell reported a net profit of 359 million euros in the second quarter of this year, which, together with the 205 million euros in the first quarter, totaled a net profit of 564 million euros in the first half. Note: First quarter results were quite weak due to the impact of Spain’s new banking tax. I discussed the new tax in this old article about BBVA (BBVA), which has a profound negative impact on Banco Sabadell since most of its assets are located in Spain (unlike Santander or BBVA, which are Other regions have large assets and are therefore less sensitive to the new Spanish bank tax). The new bank levy is not tax deductible (sadly), but there is some good news as payments from the Single Solution Fund are likely to be reduced as the “establishment phase” is now complete.

With 5.6B shares currently outstanding, earnings per share are approximately €0.10 (adjusted for the AT 1 coupon, earnings per share are €0.11).

As of the end of June, the bank had approximately €243B of assets on its balance sheet, with equity representing approximately €13.5B of assets. This is important because the total equity ratio increased compared to a year ago. The balance sheet has shrunk by €14B in the past 12 months, while total equity has increased by approximately €500m, with the equity to total assets ratio rising from 5.07% to 5.55%.

It’s also important to keep an eye on the balance sheet, as total nonperforming loans have been increasing (not surprising given rising interest rates and a shrinking economy). The total amount of non-performing loans remained stable in the second quarter, and the total asset provisions in the third phase increased to 56%.

As a result, Sabadell’s NPL problem appears to be under control thanks to ongoing loan loss provisions recorded every quarter. Also encouraging is the fact that the total amount of loans in the second phase decreased by approximately EUR 600 million. It is also important to confirm that Sabadell has good access to liquidity. The loan-to-deposit ratio is relatively low at 95%, while liquid assets on the balance sheet are approximately €58B. This 58B euros accounts for almost 40% of total customer deposits.

I still like the UK mortgage portfolio held by TSB subsidiaries. The bank’s CET1 ratio on a fully loaded basis is quite high at 17.3% and its loan loss provisions are very low. In the second quarter, the risk cost was only 0.15%.

The reason for the strong performance of the UK loan book is very simple. Over 90% of the £33.7B in loans related to residential property (excluding properties in the buy-to-let category). In this loan book, 85% of the loans have a loan-to-value ratio of less than 75%, while the average loan-to-value ratio is just 55%. This essentially means that nearly £34B of mortgages were backed by £61B of real estate at the time the loans were underwritten. So even if property prices in the UK fall by 30%, the residential loan book should still be fine. Of course, recent loans with higher LTV ratios will be more affected, so the TSB loan book is definitely not a “zero risk” loan book, but the low risk cost of around 0.15% per annum shows resilience.

How about year-round guidance?

Thanks to a strong first term, Sabadell has now been able to increase their full-year goals. While the bank expected net interest income growth to be in the “mid-teens” range, it has now revised it upward to “more than 20%.” This is not surprising considering that NII grew by nearly 30% in the first half of this year.

At the same time, the total cost of risk has declined. Having capped it at 56 basis points in the first half of the year, Sabadell now changed guidance to “less than 60 basis points” from “less than 65 basis points.” Meanwhile, return on tangible equity should now be 10.5%, about 150 basis points above the original guidance of 9%. Considering the RoTE in the first semester is around 10.8%, the new guidance actually means that the second half results will be slightly weaker.

Taking into account total vested tangible equity of approximately €10.5B, full-year earnings are likely to be approximately €1.1B, equivalent to approximately 20 cents per share. Considering that the tangible book value per share is approximately €2.07 per share, shareholders have a considerable margin of safety. In addition, the bank launched a 204 million euro share buyback program that could increase tangible value by about 4 cents per share.

This sounds counterintuitive since banks can only repurchase a little over 3% of their shares, but considering the stock trades at a little over 0.5 times tangible book value, every share repurchased at such a discount would Add value to remaining shares. share.

Bearing also in mind that the bank has been guiding for further RoTE increases from 2024 onwards, if we assume a RoTE of 11% on a tangible book value of €2.10 per share, EPS could come to around 23 cents per share. On an annualized basis.

investment thesis

Banco Sabadell is a relatively small bank, with “only” €250B in assets, and is only focused on two core markets: Spain and the UK, which increases the risk profile somewhat. Having said that, the loan book now appears to be stabilizing, with total loan loss provisions and impairment charges set to be lower than expected. Applying a 60 basis point cost of risk across the entire portfolio shouldn’t be an issue for Sabadell, as its net interest income and fee income should be enough to account for those issues.

Additionally, its CET1 ratio of 12.88% is 422 basis points above the minimum requirement (shown above), implying a capital surplus of €3.3B or nearly 60 cents per share based on €78.5B in risk-weighted assets. This obviously doesn’t mean Sabadell will allocate “excess capital,” but the combination of a nearly 50% discount to tangible book value, a P/E ratio of around 5, and a strong capital buffer make Sabadell interesting again.

The downside, of course, is the strong correlation between financial results and the Spanish economy. Spain’s loan book has about €42B lent to SMEs and corporates, so I would keep a close eye on asset quality there.

I currently have no position in Banco Sabadell, but it looks like the stock has been unfairly punished recently and may be worth taking a speculative long position.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.