Thursday, October 8, 2020

Banco de Sabadell Dogged By Weak Earnings And A Heavily Discounted Valuation

One of the most common pieces of advice you’ll find on investing is not to buy stocks on the expectation of a buyout. Personally, I’d attach an asterisk to that – it’s fine to buy a stock where a takeout is a credible part of the thesis, but make sure you can live with owning the stock on its own merits, at least for a while. That brings me to Banco de Sabadell (OTCPK:BNDSY) (SAB.MC) – a top-five bank in Spain that is struggling to deal with weak spreads, elevated loan losses, and a weak UK subsidiary.

Banco de Sabadell has been linked to both BBVA (BBVA) and Santander (SAN) as a potential merger partner, and further consolidation of the Spanish banking sector would make sense for either bank – Sabadell would expand their business lending operations and create some meaningful cost-reduction opportunities.

As I’ve said in the past, banks that sit at either end of the return on tangible common equity curve (especially high or low) can trade at distorted multiples relative to more “normal” peers, and that’s the case here. With weak growth prospects over the next few years, Sabadell trades at less than 20% of its tangible book value. I don’t love Sabadell, and I think it’s tough to generate long-term gains in banks that can’t earn their cost of equity, but I do think the valuation and capital can support a speculative play on a buyout bid.

 

Follow this link to the full article: 

Banco de Sabadell Dogged By Weak Earnings And A Heavily Discounted Valuation

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