The share price of Banco Bilbao Vizcaya Argentaria (BBVA) (hereafter simply “BBVA”) has barely moved since I published my previous article on this Spanish bank in May 2021. As there is now a greater clarity around the world on how the fallout from COVID will be handled, it might be a good idea to dig a bit into the recently released financial results for fiscal year 2021 to see how the bank has performed and what she waits for this year.
BBVA has a liquid listing in the United States with an average daily volume of over 2 million shares, but since BBVA is a European bank reporting its financial results in EUR, I will refer to the main listing of the bank on the Stock Exchange of Madrid, where BBVA is also trades with BBVA as a ticker symbol. The average daily volume in Madrid exceeds 20 million shares.
A satisfying 2021
Although this is a Spanish bank, publishing its results in euros, we must bear in mind that Spain is actually only a rather small contributor to the consolidated profit. In 2021, for example, Spain contributed less than 30% of the total attributable net profit, while Mexico accounted for almost half (!) of the net profit. This means that BBVA could also rightly be considered a Mexican bank with some foreign exposure.
In 2021, BBVA reported net interest income of €14.7 billion, an increase of approximately 0.6% compared to the reported net interest income generated in 2020. Gross income increased by 4.5% to 21.1 billion euros thanks to much higher fees and commissions. and commercial income.
Operating expenses also increased, at a fairly similar pace, meaning that BBVA’s operating profit rose by around 4.1% to 11.5 billion euros. A good result which was also negatively impacted by the evolution of exchange rates because at constant exchange rates, BBVA could have posted a 10.8% increase in operating profit.
Profit before tax is 71% higher than in 2020, and this is mainly due to a much lower impairment charge and provision charges, which fell from a combined 5.9 billion euros in 2020 to just less than €3.3 billion in 2021. Net profit was approximately €6.03 billion and attributable net profit, including the impact of non-recurring items, was €4.65 billion. euros, for an EPS of approximately 0.71 euro per share. This means that BBVA is currently trading at around 8 times its 2021 EPS.
BBVA already paid an interim dividend of EUR 0.08 per share in October and has now proposed to pay a final dividend of EUR 0.23 per share. This would bring the annual dividend to EUR 0.31 per share, or a dividend yield of around 5.4%. The dividend policy was also recently updated and BBVA is now targeting a payout ratio of 40-50% of attributable net profit compared to the payout ratio of 35%-40% previously used.
Additionally, BBVA will likely continue to buy back its own shares. In October 2021, the bank received formal approval from the ECB to spend €3.5 billion on share buybacks. Since this authorization was granted on October 26, a total of 171 million shares have been repurchased by the end of January 2022. This represents almost 3% of the number of shares. This means that we can expect 2022 EPS (and DPS) to remain strong, although reported net income will not increase at all.
Turkey will be a key element for 2022
While the bank has clearly seen less impact from the COVID pandemic and loan loss provisions (and impairments), it will be interesting to see how the bank can perform in 2022 and there are several things I will keep on an eye.
First of all, after excluding non-recurring items from the equation, net income group share would have been higher by almost 10%. This, combined with a lower number of shares, would already be enough to boost EPS to over 80 cents per share, keeping everything else unchanged. Perhaps we can expect improved net interest income to offset loan loss provisions and potentially higher impairment charges in 2022. Another item I will have to keep an eye on is the Turkish division, as the Turkish economy has been exceptionally volatile and fluctuations in exchange rates will have an impact on the attributable profit expressed in EUR. As shown below, we have seen the NPL ratio drop from 6.51% at the end of Q3 to 7.09% at the end of FY2021 and I wouldn’t be surprised if the situation improves. got worse before it got better.
Despite this, BBVA is determined to further increase its exposure to Turkey. It has already generated net attributable income of 740 million euros in fiscal 2021, but is now in the final stages of acquiring the 50.15% stake in Garanti, the Turkish division. Due to the formula used to calculate the CET1 capital of a minority stake, the maximum impact of the acquisition of Garanti will remain limited to only 46 basis points on the CET1 ratio which will remain comfortably above 12% and could likely to exceed 12.5% by the end of this year. BBVA said the acquisition could increase net profit by 13.7%. It is also very interesting that the acquisition offer is made in Turkish lira and that the lira has lost around 30% of its value. While BBVA expected to pay a total consideration of 2.25 billion euros based on the exchange rate at the time the deal was announced, the weak lira has now reduced the euro equivalent price to just 1.65 billion euros, a saving of 600 million euros. Turkish acquisition slightly less risky (but of course the profits generated by the Turkish division expressed in euros will also be affected).
BBVA has published a good result for the 2021 financial year and investors should be aware that although it is a Spanish bank, the vast majority of its income will be generated in Mexico and Turkey, probably up to approximately 65% to 70% after the completion of the Turkish acquisition.
I think BBVA has a good chance of keeping the EPS at least stable this year despite the headwinds in Turkey. The increased exposure to the Turkish market and the €3.5 billion share buyback program will protect performance per share, which also means that I don’t think we will see a dividend lower than the dividend for the financial year 2021 of EUR 0.31 per share.
Trading at less than 0.9 times tangible book value and around 8-8.5 times expected earnings for this year, BBVA is cheap. I was looking to increase my exposure to the financial sector (to indirectly increase my exposure to potentially rising interest rates) and BBVA is now a good fit thanks to its geographically diversified exposure.