Ibex35: CaixaBank

We will analyze the financial situation of CaixaBank after its re-organization, its results, assessment and prospects to determine whether this is an interesting investment opportunity in the long-term.

Company Description CaixaBank was founded after the re-organization of La Caixa business, approved on 24^th February by both Criteria’s and Caixa’s boards. The process ended on July 1^st with the disappearance of Criteria, which had been the holding of the subsidiary of Caixa. Afterwards, CaixaBank started trading. La Caixa continues to be the parent company with an 81.1% stake in CaixaBank, formed by the banking and domestic insurance business, minority stakes in foreign financial institutions and shares in Repsol (13%) and Telefónica (5%). €4.651mn of foreclosed assets, welfare assets related to social projects and the rest of the industrial portfolio holdings of Grupo La Caixa remain in the hands of the parent company.

Caixabank was born with a practically clean asset balance sheet (€152mn, 0.1% of Average Total Assets). It is the third largest banking group in Spain by volume of assets (€ 273.388mn) and the largest retail banking franchise with a market share exceeding 10% in individual products, 10.5mn customers and a network of 5,247 branches.

2010-2014 Strategic Plan CaixaBank has presented a strategic plan with objectives to 2014 of which the most interesting ones are: (i) core capital above 8% in December 2012 under Basel III; (ii) ROE in the double digits in 2014 (approximately 15% versus present 8%); (iii) a minimum dividend for 2011 of € 0.231 per share, implying a payout of 51% and a dividend yield at current prices of 6.9%; (iv) a market share in Spain of 15% in business (currently 12.5% ​​in branches and 10% in business); (v) income statement objectives: interest margin to grow at a cumulative annual rate (CAGR) of +10% in the period 2010-14E, commissions: CAGR of +5.5% -6% in 2010-14E, driving the product growth with higher commissions, efficiency ratio of 40% in 2014E (44% at present), credit risk premium: 0.6% -0.7% in 2014 (1% at present).

First Half 2011 Results The results showed a year on year decrease in net interest income in the first half of -17% (-7% in Q2 compared to 1Q11) due to the higher cost of liabilities (+16 bps versus 1Q11) and the increase of +4% of retail deposits (+ €6.500mn compared to + € 0.3 mn in loans). Against this, the gross margin increased by +3.8% (€1.873mn) thanks to the good performance of the commissions and income from investments. Moreover, the allocations of recurrent non-performing loans (€677mn) double those of the 1Q11. Profit before tax (EBT)  on the first semester fell  -17% compared to the same period last year, while net profit increased by +11.3% (€833mn). This was due to strong year on year increase in net profit for the second individual quarter, which increased by +56.7% (€533mn), driven by revenue (€47mn), thanks to a greater contribution to profit from investments and dividends. In addition, the sale of 50% of SegurCaixa Adeslas to Mutua Madrileña generated net gains of €450mn for the quarter, partially offset by special provision allocations (€332mn net of taxes). During the 1H11 the deterioration in the development sector has continued, which has led to an increase in delinquency in this segment of 234 bps in 2Q11 (20.3%) and a reclassification of 7% of the substandard portfolio. In the second quarter, only €125mn in assets were foreclosed compared to the €177mn corresponding to the month of March alone. Most of the foreclosed assets are from the residential mortgage portfolio (€83mn). In the sale process of foreclosed assets there was an average book value loss of 6% compared to 3.5% in the first quarter of 2011.

The outlook for the company itself for the second half of the year points at a rebound in net interest income due to the Euribor increase in the mortgage portfolio, the higher margins on new production and the decline in the retail cost of liabilities.

CaixaBank vs. other listed domestic banks

Caixa Bank currently trades at a ratio of price/book value of 0.62 x, in line with other domestic banks but clearly above that of Bankia, which was released at a valuation of 0.41 x price/book value. With the announced dividend policy, it offers a dividend yield at current prices of 6.9%, higher than the other domestic banks and 62 basis points above that of Banesto, the next most profitable bank that is trading at similar levels in terms of price/book value.

Conclusion

Following the restructuring of GrupoLa Caixa, CaixaBank has one of healthiest balance sheets of the Spanish financial system, with a default rate lower than other banks (4.3% versus 6.4% of sector) and lower exposure to the real estate sector. Moreover, it has a core capital ratio of 11.3% and it has not yet used resources that other entities have already depleted such as “sale and lease back” operations, general provisions and unrealized gains on its holdings. Its liquidity position should pose no problems (with liquid assets of €21,633bn, almost 8% of its assets) and it offers a dividend yield of 6.9%. On the other hand, we believe that to meet its aggressive strategic plan it will have to make acquisitions, which consequently involve risk in their execution. This, together with its fundamentally domestic nature, with high exposure to the Spanish economy and the fact that it continues to trade at high ratios as compared to “comparables” such as Bankia, despite its cuts, leads us to be wary of the value. We recommend waiting for a greater stability in the financial markets to take investment positions in the medium-long term.

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