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Exane BNP Paribas Equity Research BBVA Focus North of Rio Grande Banks - Spain Stock vs Sector Sector vs Market Price (20 September 2004) Valuation Neutral Outperform EUR11.2 EUR11.0 (-2%) ► BBVA has announced today the acquisition of a bank in southern Texas for UD850m. ► The price paid represents a 2004e PE of 16.1x and a P/BV of 2.7x. Adjusting for expected synergies and tax shields the PE falls to 10.1x. ► BBVA expects the acquisition to be earnings accretive by c. 1%. ► We think the acquisition makes strategic sense and should guide the market towards BBVA’s intentions to engage in small value-creation add-on acquisitions rather than be involved in a major cross-border deal in Europe. Market cap./Free float (EURbn) 12-month high/low (EUR) Reuters/Bloomberg DJ STOXX50 Performance (%) Absolute Rel. DJ STOXX50 Rel. sector 37.9/37.0 11.4/8.9 BBVA.MC/BBVA SM 2,705.5 1-w 1-m 3-m 12-m (2) (2) (2) 4 (2) (2) (0) 1 (1) 17 9 7 Data available soon. Laredo National Bancshares (LNB) is a financial group with 35 branches in Texas and assets of USD3.4bn. The group operates under two banks: The Laredo National Bank (63% of net profit) and the South Texas National Bank (15% of net profit). The group has also a mortgage lender, Homeowners Loan Corporation (22% of net profit) which originates business mainly through direct mail and the internet and has licenses to operate in 49 US states. We would not rule out a disposal of Homeowners Loan Corporation (HLC) in the future as this it has little fit with BBVA’s business model in the US, which focussed at providing banking services to the US Hispanic population. Price relative to DJ STOXX50: 19/5/04 18 16 14 12 10 LNB is to be integrated in newly created US Retail and Business banking unit (alongside BBVA Puerto Rico, Bancomer Transfer Services and Valley Bank). In Valley Bank and Bancomer Transfer Services (BTS) BBVA targets mainly the newly arrived Hispanic population to offer primarily money-transfer services and basic banking products. However, with LNB BBVA is targeting a more sophisticated client base: mainly secondgeneration Mexicans living in South Texas to offer a wider range of commercial-banking products but also banking solutions to businesses in the region, where 38% of the trade between Mexico and the US is done. 8 6 2001 2002 BBVA Relative to DJ STOXX50 Source Datastream Jagoba Garcia +44 207 595 28 82 [email protected] 2003 2004 LNB’s net profit was USD40m in 2004, but BBVA expects it to earn USD53m this year. The multiple paid is 16.1x 2004e earnings with compares favourably with average transaction multiples of 20.3x in Texas and 22.1x in US since 1997 according to BBVA (we note, however, that this period includes the bull market). The acquisition will generate circa USD350m in goodwill. On BBVA’s estimates, the acquisition is accretive as from 2005. EPS accretion is 0.9% 1% and 1.2% for 2004e, 2005e and 2006e, respectively. BBVA expects cost synergies of USD19.5m pre-tax (USD13m post tax). This is 10% of the current cost base and represents 30% of the central services costs in the two banks alone (exclude Homeowners Loan Corporation). We think the target looks reasonable. Revenue synergies of USD10m post tax (USD16m pre tax) are to be reached in three years and can simply be achieved by only transforming the debt portfolio of the bank (USD1.1bn at the end of 2003) into lending (leveraging the balance sheet). Important Notice : Please refer to our full Disclaimer notice available on www.exanebnpparibas.com/disclaimerequities. The NPV of the tax shield from the goodwill (which will be tax deductible in Spain) is estimated at USD85m. If we add the USD23m post-tax synergies to the USD53m earnings expectation for this year and deduct the USD85m tax shield from the USD850m price, we arrive at a PE of 10.1x, which is a good price for a bank with relatively high growth potential in the US. All in all, we think that this acquisition makes a good strategic fit and the valuation looks reasonable when integrating the synergies. The recent flow of transactions should help the share price as they point to should indicate to the market BBVA’s intentions to engage in valuecreation small add-on acquisitions, rather than going for a major acquisition with less strategic sense, which could potentially destroy value. We will be revising our estimates and valuation slightly to integrate the acquisition of LNB today and Hipotecaria Nacional in Mexico last week, both of which we look upon favourably. However, we see limited upside potential and, hence, maintain our Neutral recommendation. 21 September 2004 Forthcoming events Date Event 25/10/2004 Q3 2004 Sales and Net Profit 31/01/2005 2004 Net Profit Commitment of transparency (see www.exane.com/disclosureequitiesuk for details) Exane Investment banking Corporate links Analyst’s personal interest NO NO NO Equity stake US Law French Law NO NO Disclosure to company Additional material conflicts NO NO Source: Exane BNP Paribas Exane is independent of BNP Paribas (BNPP) and the agreement between the two companies is structured to guarantee the independence of Exane's research. Nevertheless, to respect a principle of prudence, we separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document. NA Source: BNP Paribas 2