BBVA - BBVA Crushes My Dividend Expectations After A Record Profit

Summary

• BBVA is a large Spanish bank, but its Mexican division brings in the most money.
• My EPS and DPS expectations were easily surpassed: BBVA will pay 0.50 EUR in shareholder rewards, including a 420M EUR share repurchase plan.
• The rapidly expanding net interest income should offset increasing loan loss provisions.

Introduction

In my August article, I argued Banco Bilbao Vizcaya Argentaria (BBVA) was very attractively priced. The market was a bit upset after the Spanish government unveiled a new bank tax, but in my article I calculated the impact for BBVA to be just 4 cents per share (and 5% of the full-year earnings). A bummer, but manageable. I also argued the bank would be paying a 7% yield as according to my calculations, BBVA would report an EPS of 0.80-0.90 EUR, resulting in a dividend of 0.32-0.45 EUR per share. The lower end of that spectrum would result in a yield of 7.3% as the stock was trading at just 4.4 EUR.

BBVA has now published its full-year results and I was dying to see how close my EPS and DPS estimates ended up to the effective result. The share price is currently trading more than 50% higher (despite paying an interim dividend of 0.12 EUR per share.

Although the bank has a liquid US listing, I will refer to its Madrid listing as BBVA reports its financial results and dividends in EUR.

The FY 2022 results were better than I had expected

Thanks to the rapidly increasing interest rates which really fueled the net interest income BBVA easily beat my expectations. Keep in mind I made the projections after BBVA posted a 0.51 EUR per share in adjusted earnings in the first half of 2022 and it still was dealing with the fallout of the proposed bank tax which was only established at the end of December.

What I didn't account for was the extremely fast step-up in the net interest income. As you can see in the image below, BBVA's net interest income increased throughout the year. The jump from less than 4B EUR in Q1 to 4.6B EUR in Q2 was already nice to see, but it didn't end there. During the third quarter, BBVA's net interest income increased once again to 5.26B EUR before the growth slowed down somewhat (as it had to start paying a higher interest on deposits) with a net interest income result of 5.34B EUR in the final quarter of 2022.

The gross income did not increase on a QoQ basis. Not only because the net trading income dropped by a few hundred million, but also because the 'other operating income' includes the new Spanish bank tax, budgeted at 225M EUR by BBVA. That's actually less than the 4 cents per share I had expected.

And don't worry too much about the slowdown in the net interest income; that appeared to be mainly a function of FX. On a constant currency basis, there actually was a further acceleration so that bodes pretty well for 2023 barring any sudden FX changes and unforeseen circumstances.

That's not a surprise considering the bank reports its financial results in Euro, but it generated almost 80% of its attributable net income in foreign currency in 2022. The Mexican division, for instance, contributed 150% more to the net income than the Spanish division did.

The very strong results throughout the year obviously also meant the bank posted a record profit. Whereas the adjusted EPS was just 0.35 EUR in 2020 and 0.71 EUR in 2021, BBVA easily beat my expectations by posting a bottom line result of 1.05 EUR per share on an adjusted basis.

BBVA is making good on its dividend promise

BBVA announced a total of 3B EUR to reward its shareholders for their patience. That's approximately 50 cents per share and represents a 47% payout ratio . Keep in mind BBVA has a different interpretation of 'payout ratio' as only 43 cents of the 50 cents will be in the form of a dividend. The remaining 7 cents per share in shareholder rewards are related to a new 422M EUR share buyback program which should enable BBVA to retire approximately 1% of its share count.

This means the cash dividend payable over the FY 2022 results is 43 cents per share, of which 12 cents has already been paid in October as an interim dividend. The final dividend of 31 cents per share will be payable in the second quarter of this year.

Investment thesis

The very strong result in the second half of the year (despite the impact of the bank tax) bodes well for 2023 and BBVA could actually have a shot at seeing its EPS increase further towards 1.1-1.15 EUR per share. The major unknown factor at this moment are the loan loss provisions. During 2022, BBVA recorded about 3.5B EUR in loan loss provisions (compared to approximately 3B EUR in 2021), and although we should expect the full-year net interest income to increase again versus 2022, a weaker world economy could indicate some of the borrowers may have more difficulties to meet the repayment commitments.

That being said, I think BBVA should be able to keep its adjusted EPS above 1 EUR, in which case the current share price still represents an earnings multiple of just under 7. I have a long position in BBVA and I am happy to hold at this point. But for investors looking for an entry point to gain exposure to this Spanish bank with Mexican assets, the stock is still cheap at 0.9 times the Tangible Book Value.

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