S&P Global Ratings has reported that the sale by BBVA of its US subsidiary will strengthen its capital in the short term, but the downside risks to its credit profile remain, since it is foreseeable that it will invest the income obtained from the operation.
This week, BBVA announced the sale of its subsidiary in the United States to PNC for a price of approximately 11.6 billion dollars (9.7 billion euros) in cash, which will generate a capital gain net of taxes of about 580 million euros and equity tangible will increase by 1,400 million euros. The closing of the operation is expected in mid-2021.
S&P sees this deal as an “attractive” opportunity for BBVA to divest businesses in a competitive market where it has struggled to achieve adequate scale and return on investment, like many other European banks.
BBVA estimates that this transaction will improve its Tier 1 ordinary capital ratio by 294 basis points, from 11.52% as of September 2020. This would place its capital well above its established capital objective (225-275 basis points per above the regulatory requirement, currently 8.59%).
In S & P’s view, the transaction will also lead to a significant increase in the risk-adjusted capital ratio well above the 7% threshold for a proper assessment.
However, the firm believes that this improvement could be only temporary. This is because it expects the bank to allocate the additional capital buffer largely towards some combination of M&A opportunities in its core countries, possible business restructurings and share buybacks (subject to regulatory approvals). In fact, BBVA has already begun to negotiate the possible acquisition of Banco de Sabadell.
At this stage, S&P maintains its BBVA rating (‘A -‘ / ‘A-2’) unchanged and the negative outlook continues to reflect the possibility that an adverse economic scenario will strongly affect the bank’s profitability and its ability to preserve the capital at an appropriate level.
In addition, given the planned divestment of US assets, generally of better quality, the rating agency estimates that the bank’s risk profile “will be increasingly sensitive to adverse events in Spain.”
On a pro forma basis, he estimates that the bank will allocate about two-thirds of the group’s exposure to local business. They also expect the group’s problem asset ratio to rise from the current expectation of 5.5% to 6.2% in 2021.