Caixabank's welcomed defensive profile

As part of an indiscriminate sell-off, CaixaBank’s share price moved in tandem with the rest of the sector until the summer, when it started to overperform (+7% ytd) ahead of the release of the group’s second quarter results. We see the 32% upside potential as deserved by a quality business. 

Market’s short-lived pandemic reaction on stronger provision frontloading

The second quarter results came in at €115m, below consensus expectations, driven by higher-than-expected loan impairments. Also, asset quality showed the first signs of deterioration with a the gross NPL entry rate increasing to 1.8% of the performing loan book. However, management reiterated its full-year cost of risk guidance of 60bp-90bp, thus confirming that the accelerated provisioning effort of the second quarter corresponded to a frontloading, not to deteriorating anticipations.

On the other hand, investors’ anticipation of resilient second quarter earnings was met at the pre-provision level. Net interest income enjoyed a relatively stable margin while fee income generation resisted pretty well when compared with peers. The insurance recovered to decent levels while the group made strong trading gains to finance the accelerated provisioning effort. The quarter enjoyed strong activity levels with loans up almost 4% qoq driven by corporate lending, and assets under management recovering by more than 7% over the period after the 10.7% correction of the previous quarter.

Last but not least, the cost base proved particularly flexible, showing strong efficiency gains. Management confirmed its 2% cost reduction guidance for the year and announced €300m of extra cost savings for 2021.

Investors took their profits on the back of the release but seems to have come back, maybe better assessing the group’s solid performance in the light of the release of the peer group’s results.

The recipe of resilience

The group’s resilience does not come as a surprise. It relies on two important dimensions: the size and the business model.

CaixaBank is a price-maker player thanks to its dominant market positions. Indeed, the group is Spain’s largest player with a 16% domestic market share. However, its footprint is skewed towards Catalonia and the Balearic Islands where it has secured market shares above 20% in loans and of around 40% in deposits (the group is a former savings and loans).

CaixaBank has developed a unique bancassurance model which enables it to optimise capital usage (the regulator usefully considers that the insurance business provides risk diversification) thus boosting the profitability potential. The banking business accounts for only half of the group’s results while the other half is well spread between insurance and payments. The contributions of consumer finance and asset management are relatively marginal (around 5% each).

Defensive profile pivotal to resist NIRP disruption

The analysis of P/BVs shows that the market is discriminating Eurozone banks and, within Eurozone banks, pure lending players. In our view, this reflects the market’s concerns about the potential disruption of prolonged negative interest rates on the profitability of the lending business, as seen also in Japan.

CaixaBank offers a particularly defensive profile in our view. The past evolution of its net interest margin has demonstrated a strong capacity to resist a low/negative interest rates environment. On top of that, the group managed to increase non-interest income, thus enabling it to show very resilient revenue margins. At last, the group has demonstrated a strong capacity to keep costs under control with remarkably stable efficiency.

Undervaluation whatever the approach

As shown in the table below, every valuation approach we use returns a subsantial upside potential. Still time to build up a position as it happens.