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BBVA: Spanish bank highlights huge payout pot for Europe

Monday morning’s tepid share price reaction suggests most BBVA investors knew what was coming. Chair Carlos Torres Vila spelled it out for anyone slow on the uptake. The Spanish bank will pay out €7bn in 2021 and 2022, almost one-fifth of the current market capitalisation. Better still, reduced capital targets for 2024 should permit further outsized returns.

BBVA’s announcement is the earth tremor heralding a gusher of cash from European banks. They are sitting on €77bn worth of equity above management targeted capital buffers, according to Citi. Better than expected earnings from rising rates and lower loan losses contributed last year. Regulators curbed dividends for political reasons.

As Europe learns to live with coronavirus, excess capital will come back to shareholders. Buybacks worth €35bn are scheduled this year. Joining BBVA atop the list are ING, Lloyds, UniCredit and BNP. The sector as a whole is expected to yield returns of about 8.5 per cent in 2022.

The coffers at BBVA have been stuffed since selling its US division to PNC at the end of 2020. Half of the €7bn pencilled in for shareholders will be via buybacks. The rest will come as dividends.

BBVA recently increased its payout ratio to 40-50 per cent. Even after buying out the part of Turkish bank Garanti it does not own, BBVA is sitting on significant spare capital.

BBVA is targeting a common equity tier one ratio of between 11.5 per cent and 12 per cent by 2024. The figure stood at 14.5 per cent in September. About 100 basis points of capital, or €3bn, still needs to be allocated after the deduction of earlier payout promises.

Shareholders will favour further buybacks when the current one ends. But M&A should not be ruled out. BBVA may be tempted by Sabadell, as its turnround progresses. That would bolster SME lending and yield cost cuts through branch consolidation. Citi foresees savings equivalent to 17 per cent of Sabadell’s costs, or €536m annually.

A share-based deal might cost 30bp of regulatory capital. That would still leave money on the table for buybacks.

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