Taking technology a step further
THE MARKET SEEMS to have fallen out of love with BBVA. Despite its continued strong performance and growth across the board, the bank’s stock no longer commands the premium it once did. Worse still, one or two analysts have even started to speculate that the bank could become a takeover target or even become a break-up candidate like ABN Amro.
Such speculation is hardly fair on Spain’s second-largest bank, which has more than doubled its shareholders’ money over the past five years and achieved the kind of efficiency ratios that most banks cannot even imagine. BBVA has a bold vision in retail banking, in which it is already among the most sophisticated players and it has forged an excellent position in Mexico, one of the world’s most promising banking markets. Having formed an alliance with and acquired a stake in China Citic Bank, the seventh-largest bank in China and its Hong Kong-based international business, in November 2006, BBVA is entering a new phase of international expansion.
BBVA’s share price has been languishing since it surprised the market with two capital increases in 2006, and in February 2007 announced its plan to acquire Compass, a Texan bank, at 20 times forward earnings and 3.4 times price to book for €7.38 billion. Although the strategic argument for the deal has been well received, many analysts question how much incremental value the bank can create at that price and investors are worried that more acquisitions could destroy value.
Ironically, the market view that BBVA is a predator has depressed its stock to the point that some now think it could itself become prey. In a June 2007 report, Deutsche Bank analysts suggested that the bank could be worth between 16% and 38% more were it broken up.
Compass is BBVA’s biggest acquisition to date and is the new cornerstone of its US business, which includes four other small banks in the Sun Belt states, a region growing 76% faster than the country as a whole, bought over the past three years. In the US, BBVA has done a particularly good job of building business on the back of the region’s proximity to Mexico, establishing a strong franchise among Hispanic customers and capturing a large proportion of the $25 billion a year annual remittance flow to Latin America, thanks to its Bancomer Transfer Services remittance business. For many analysts, however, the price tag is just too much to swallow, especially for a bank that already operates with a return on equity of 17.6% and an efficiency ratio of 56.2%.
Although a cost/income ratio of 56.2% might be hard for many banks to improve on, BBVA should have little difficulty, if past experience is anything to go on. The group, which managed a cost/income ratio of 41.6% for the first half of 2007, believes it can further improve on that impressive figure to reach 35% by 2010. Such levels seem achievable given that its current businesses in Mexico and the US already operate at 38.1% and its businesses in Spain and Portugal at 37.4%.
"People have been asking us how we can improve on our efficiency for years," says Francisco González Rodríguez, chairman and CEO of BBVA. "They asked us that back when our cost/income ratio was 50% and when it was at 48%. Today its 41.6% and we have set ourselves the target of 35% by the end of 2010.
"How will we meet this target? When you are already one of the most efficient banks in the world the only way to meet such targets is to attack them in unconventional ways. We see our business as an industrial financial services company. ‘Industrial’ because we believe that in order to maximize efficiency we have to scrutinize all the things we do today as industrial processes; ‘financial’ for obvious reasons; and ‘services’ because we want to be close to our customers and serve their needs as people.
"When it comes to efficiency we have specific teams targeting every aspect from the structure of the company from the back office, to the front office. For the back office we have a plan called ‘Transformation of Productivity’ where people are studying every process to see how they can be improved or sometimes overhauled completely. Our programme for the front office is even more advanced as we’re not just making small improvements but looking at devising entirely new products and services."
BBVA has also proved its ability to export its business model and make a success of acquisitions with Bancomer in Mexico. When BBVA took hold of Bancomer in 2000 it got what observers considered to be the runner’s up prize, second to Banamex, which Citi grabbed at about the same time. They assumed that Banamex, with the global weight of the mighty Citi behind it, would wipe the floor with the "second-best" pairing of BBVA-Bancomer but they couldn’t have been more wrong.
Improving second-best
"If you compare where Bancomer and Banamex were in 2000 to where they are today, it’s incredible," says Antonio Ramirez, an analyst at Keefe Bruyette & Woods. "Its amazing just how much value Bancomer has created under the management of BBVA and how laggard Banamex has been under Citi. After seven years there’s no doubt that BBVA has done a much better job."
With 1,700 branches and a 27% share of total lending, Bancomer is widely considered to be the best-placed bank in Mexico to capitalize on the country’s expected financial services boom.
Mexico is one of the most attractive banking markets in the world, with astonishingly low penetration levels, which have yet to achieve their pre-1994 Tequila Crisis levels. Analysts at Santander believe that credit volumes in the country could be set to soar, possibly doubling in just three to five years, and that the country could be in for a Spanish-style decade-long banking boom.