1.Story
Caixabank is a spanish retail bank, has a very strong focus on
serving clients in Spain 90% and 10% in Portugal thanks to the recent purchase
of 100% of the Portuguese bank BPI. The bank provides traditional banking
services to Individuals, Small-Businesses, Private Corporations and Public
Sector. In 2018 the firm generated a gross income of €8,767 millions
and an income before taxes of €2,806 millions.
Caixabank
has completed the first strategic plan launched four years ago and have begun a
new plan for 2019-2021 horizon. During
the period 2015-2018 (first strategic plan), the company has improved ratios,
margins, and market presence as we see in the tables below:
Thanks to
the effort of restructuration, Caixabank is running a simple commercial banking
system combining physical branches and the digital world, a business model that
covers all financial and insurance needs, and that will get more market
presence for the company.
2.Valuation
The
valuation I proposed is based on a Free Cash Flow to Equity (FCFE) Model. The
FCFE are projected and planned in detail for the next 5 years. After 5th
year, the bank is assumed to be in a steady state.
The absolute level of the FCFE is a function of
Caixabank’s Risk Adjusted Assets (RWA), their growth (g), its Common Equity Tier
1 Capital in terms of RWA (CET1 ratio), and its expected return on equity
(ROE). To estimate
present values for these FCFEs, we also need to estimate the cost of equity for
next years and beyond. For all of these parameters I make the following
assumptions:
1. RWA will grow at expected inflation of Euro
Zone (+1.80%) forever.
2. The Common Equity Tier 1 Capital Ratio (CET1
Ratio) of Caixabank is 11.80% and the firm revealed its objective for the next 3
years at 12% plus 1% to absorb any potential regulatory impact. After year 3, I
assume the ratio will stay around 12%.
3. The firm expect to achieve a return on
tangible equity (ROTE) over 12% in 2021 and the current ROTE is 9.3%, it means
an increment of 270 basis points. I assume for ROE the same proportional increment,
passing from current 8.26% up to 10.66% in 2021. The following years ROE will
be at level of 10.66% and, in the steady state, the ROE is assumed to amount to
the current average cost of equity of European Banks (estimated in the next point
5).
4. To arrive at the current cost of equity, I
use the average beta for the European banking industry (1.16) that reflects
Caixabank´s exposure in the retail banking business, in conjunction with the
euro risk-free rate of -1.85% and an equity risk premium of 7.90%.
5. To estimate the cost of equity at end of year 5, I will adopt a different way. To illustrate the process, consider the median bank at start of 2019, trading at a price to book ratio of 0.65 and generating a return on equity of 6.68%. Since the median bank is likely to be mature, I will use a stable growth model to derive its price to book ratio:
Plugging in the median bank´s numbers into this
equation and using a growth rate equal to the expected inflation (+1.80%), I
estimate a cost of equity for the median banks to be 9.31%
So the proxy for the cost of equity in stable
steady for Caixabank will be 9.31%, and the Cost of equity will increase
progressively since an initial 7.31% up to 9.31%.
The following table summarizes the estimates of
net income, FCFEs, Terminal Value, Cost of Equity, and present values, over
next five years and beyond:
The sum of
all present values give us a value of equity of €29,181
millions, and dividing by the current number of shares outstanding (5,981
million), I can obtain the value of equity per share:
In May
2019, Caixabank was trading at €2.77 and looked undervalued
