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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
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Disclosure
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material conflicts
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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
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