the financial institution ought to squeeze its steadiness sheet, not simply its prospects

Unlock the Editor’s Digest free of charge

Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.

Belt tightening and deleveraging are more and more the norm for Spanish customers. That is rational given rates of interest at 20-year highs. A 55 per cent decline in new mortgage lending nonetheless stunned Unicaja shareholders on Monday.

The share worth dipped by as a lot as 5 per cent in response. That was regardless of a 35 per cent rise in third quarter internet income that beat market expectations. 

Spanish financial institution shares have outrun most European friends this 12 months. One cause, yields on their lending books observe the central financial institution’s rates of interest. Geared in direction of the mortgage market, Unicaja is benefiting; common mortgage yields rose 50 foundation factors over the quarter to three.09 per cent.

In the meantime, Spanish banks have solely slowly handed on larger charges to their depositors. Deposit prices at Unicaja rose simply 10bp into the third quarter to only 0.47 per cent, one of many lowest pass-through charges within the sector. Even with out additional central financial institution price rises, internet curiosity earnings ought to develop subsequent 12 months boosting income.

Buyers are ambivalent. Unicaja shares are caught at a steep low cost to e-book worth, partly as a consequence of a low 6 per cent return on fairness. But they commerce on a comparatively excessive price-to-earnings ratio for European banks.

That leaves new chief government Isidro Rubiales Gil with a dilemma. Unicaja’s widespread fairness tier one ratio was 14.2 per cent within the third quarter, effectively above a longtime 12.5 per cent goal. He ought to have about €500mn of spare capital, virtually a fifth of the present market capitalisation. He pays this to shareholders, purchase some development or repair the steadiness sheet to enhance the returns on capital.

Shopping for again shares at a 60 per cent low cost to tangible e-book worth is sensible, however might additionally elevate its seven instances worth to ahead earnings ratio. This tops the vary for European banks.

Stability sheet restore provides a greater use. Foreclosed actual property property valued at a internet e-book worth of €500mn linger from previous downturns. Their disposal, lined by extra capital, ought to shrink capital.

Higher returns on capital and the next valuation ought to observe. That promise ought to help Unicaja’s shares.