We cut our 2015-17E earnings by 10-15% as we incorporate Q2 trends and
reflect what we see as a much more challenging revenue environment due to
(i) declining carry trade/trading income contributions, (ii) the removal of
mortgage floors, and (iii) intensified underlying NII pressures (owing to
insufficient loan growth momentum, accelerating loan spread compression and,
in our view, front book spreads on deposits having bottomed). Our new
numbers stand 10-15% below consensus.
We now forecast below-CoE RoTBV levels in 2017E (7-10% vs. 8-12%
previously), and see the likely political instability in Spain in 2H15 further
underpinning our negative stance.
On capital, and albeit expecting FL CET1 levels to fall within the European
average (11-13% in 2017E), we question the quality, with increasing concerns
regarding the validity of the DTA guarantees (190-570bps).
■ We downgrade Banco Sabadell to Underperform from Outperform (new
TP €1.7/sh), with the bank heavily impacted by the removal of floors and
declining trading/Treasury contributions (17-25% earnings cuts) – and with
solvency levels (11.8% in 2017E) heavily supported by DTAs.
■ We upgrade Bankia to Neutral (new TP €1.0/sh), which stands as the
biggest capital generator (160bps vs. 50-80bps for peers), though with
RoTBV prospects capped at 7.5-8% by the Treasury revenue loss.
■ Banco Popular (Underperform, new TP €3.0/sh) remains our least
preferred Spanish bank, with comparatively lower RoTBVs (7% in 2017E
vs. 8-9%) and solvency levels (11% vs. 11.8-12.9% for peers).
■ CaixaBank (Neutral, new TP €3.8/sh) is our preferred option, with
superior RoTBVs (9.6% vs. 7-8% in 2017E), optimal solvency (11.8% by
2017E) and a competitive dividend policy (4-5% yield in 2016-17E).
On a relative basis, within Southern Europe, we prefer ISP and UBI in Italy
(both Outperform).