CAIXY - Is CaixaBank A Good Income Play?

2023-03-29 01:55:49 ET

Summary

• CaixaBank is a Spanish bank with a retail-oriented business model.
• After divesting its equity stakes, its fundamentals and equity story are now exclusively focused on banking.
• It offers a high-dividend yield that is sustainable and a lower valuation than its peers.

CaixaBank ( OTCPK:CAIXY ) is an interesting play for income investors due to its high-dividend yield and cheap valuation.

Company Overview

CaixaBank is among the largest banks in Spain, with a nationwide presence, and more than 20 million customers at the end of 2022. Its core business is retail and commercial banking, while the bank also offers other financial services and products, such as insurance, mutual funds, beyond others.

Its current market value is about $28 billion, being therefore a mid-sized bank in Europe by this measure. It trades in the U.S. on the over-the-counter market, but investors should note that its shares have much better liquidity in its domestic listing. The bank’s largest shareholder is La Caixa Foundation, with a stake of about 30%.

Business Profile & Growth

CaixaBank is the largest retail bank in Spain, holding a market share of about 24% in loans and 25% in deposits. It also has the largest retail branch network, holding more than 3,800 branches throughout the country. At the end of 2022, its loan book amounted to some €360 billion, while its total balance sheet was close to €600 billion. Its business profile is well diversified across banking, insurance, asset management, and consumer finance.

Beyond its strong position in the Spanish banking market, where it holds market shares between 20-30% for the vast majority of banking products, CaixaBank also has an international operation in Portugal, through its fully-owned bank Banco BPI. In Portugal, it holds market share of about 11% for the most important banking products, being among the four largest banks in the country.

While in the past CaixaBank held significant stakes in other banks and large Spanish corporates, its strategy in recent years has been to sell these stakes and focus its business on its core operations, a move that makes sense in my opinion and leads to a more simple business profile that is easier to value for minority shareholders. This means that CaixaBank’s current investment case is completely geared to banking, while in the past a good part of its equity value came from its previous stakes in Repsol ( OTCQX:REPYY ) and Telefonica ( TEF ), which was a business profile more similar to an investment company rather than a bank.

Moreover, from a capital standpoint, these equity stakes were quite costly for the bank, as the risk-weighted assets assigned to equity stakes is 290%, which means CaixaBank needed to allocate a lot of capital to these stakes. By selling them, it was also able to allocate capital to its core operations, and achieve a higher return on equity.

Regarding its balance sheet, its strategy has been to de-risk its risk profile by selling riskier loan positions and non-performing assets over the past few years. This has been a long process and its non-performing loan ((NPL)) ratio is still above the European banking sector average, but the trend continues to move in the right direction and NPLs should continue to decrease, unless the Spanish economy enters into a severe recession in the near future.

Even though CaixaBank has made several acquisitions over the past few years, its growth strategy is mainly organic, pushing for digitalization to offer a better customer service, while reducing costs and complexity at the same time. Regarding acquisitions, the bank isn’t reportedly seeking to expand its international footprint, thus it may acquire smaller competitors in its domestic market if the opportunity arises, and if it makes sense from a financial perspective.

Financial Overview

Regarding its financial performance, CaixaBank has delivered a positive operating performance in recent years, supported by a favorable economic environment in Spain and Portugal, and more recently by rising interest rates in Europe which are a strong tailwind for its revenues.

Indeed, over the past year , CaixaBank’s revenues were boosted by higher volumes and interest rates, leading to an annual growth of 5.5% to €11.6 billion.

Its loan book increased by 2.4% YoY, which is positive for revenue growth, but what had the most impact were higher interest rates, with net interest income increasing by 7.7% YoY, to €6.9 billion. Its fees and commissions income increased 3.3% YoY to more than €5 billion, supported by insurance products that were able to offset some weakness in asset management.

Regarding costs, the bank showed very good cost management, being able to report total expenses of €6 billion in the year, a decline of 5.6% YoY. This resulted in an improvement in efficiency, measured by its cost-to-income ratio of 52%. While this efficiency level is acceptable within the European banking sector, it’s higher than compared to its peer BBVA ( BBVA ) for instance which had a cost-to-income ratio of 44% in 2022, showing that CaixaBank still has room to further improve efficiency and achieve higher earnings growth in the coming years.

Despite that, CaixaBank’s operating profit has grown considerably over the past couple of years, as the bank was able to report positive operating jaws (revenue growth higher than cost growth), a trend that is likely to maintain in the coming quarters as interest rates continue to move higher in Europe.

Regarding provisions, CaixaBank has been able to report a stable cost of risk over the past couple of years at 25 basis points (bps) of total loans, showing that its credit quality is good. However, given rising interest rates and a slowdown in economic activity, it’s likely that credit quality may deteriorate in the next few quarters. This means that provisions for loan losses may increase in 2023, which is a headwind for earnings growth, even though there isn’t so far much evidence of a significant drop in credit quality.

Due to a combination of higher revenues, lower expenses, and stable provisions, CaixaBank’s bottom-line increased to more than €3.1 billion in 2022, up by 29.7% YoY. Its return on tangible equity ratio, a key measure of profitability within the banking sector, was 9.8% (plus 2.6 percentage points compared to 2021).

Going forward, the bank is geared to higher interest rates in Europe, as the European Central Bank has hiked in recent months and its guidance is for a few more hikes in the near future, which bodes well for the bank’s net interest income. On the other hand, credit quality is the major uncertainty that can affect its profitability, being therefore a key measure to monitor in its upcoming earnings release.

Capital & Dividends

Regarding its capitalization, CaixaBank has a good capitalization measured by its core equity tier 1 (CET1) ratio of 12.8% at the end of 2022. This level is in-line with the average of the European banking sector, but lower than compared to the best capitalized banks in Europe, but given CaixaBank’s retail-oriented business model it’s much higher than its capital requirement. Indeed, its capital requirement was only 8.3% in 2022, showing that its capital buffer is quite substantial and provides a solid position to distribute excess capital to shareholders.

Indeed, CaixaBank’s shareholder remuneration policy has been attractive recently, as the bank increased its annual dividend in a significant way. Its last annual dividend, related to 2022 earnings and expected to be distributed next month, was set at €0.23 per share (up by 58% YoY) and its dividend payout ratio also increased from 50% of earnings, to 55% of its profit last year.

At its current share price, CaixaBank’s dividend yield is close to 6.5%, which is quite attractive to income investors. Moreover, the bank also performed share repurchases of €1.8 billion during the last year, further enhancing its capital return policy.

Given that CaixaBank has a good capital position and does not need to retain much earnings in the short to medium term, its target is to distribute excess capital above a CET1 ratio of 12%, both through dividends and share buybacks. It has already distributed €3.5 billion during 2022, which means that it still has some €5.5 billion to distribute during 2023-24, to reach its three-year target of €9 billion.

Its guidance is to distribute between 50-60% of annual profits through dividends, thus CaixaBank should deliver a growing dividend over the next two years and perform further share buybacks. Indeed, according to analysts’ estimates , its dividend is expected to increase to €0.29 per share by 2024, which would push its dividend yield to more than 8% at its current share price.

Conclusion

CaixaBank is a bank with solid fundamentals and its operating performance is positive, supported in large part by rising interest rates. Despite this background, it’s currently trading at only 0.78x book value, at a discount to the European banking sector, and offers a high-dividend yield that is sustainable. Thus, CaixaBank is a compelling income play right now, being a good opportunity for long-term investors to get a good entry price following the recent weakness in bank shares due to woes in U.S. regional banks and the Credit Suisse ( CS ) saga.

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