BBVA's €12B move for Sabadell would create €1 trillion European banking giant

Banco Bilbao Vizcaya Argentaria SA's plans to buy Spanish rival Banco de Sabadell SA for €12.3 billion would create the 12th-largest bank in Europe, with a balance sheet of more than €1 trillion.

BBVA officially announced a takeover move for Sabadell on May 1 after reports of a possible deal forced the bank to confirm its plans on April 30. BBVA is offering Sabadell shareholders one newly issued BBVA share for 4.83 Sabadell shares, representing a 30% premium to the bank's closing price on April 29.

BBVA made a similar move for Sabadell in 2020. Disagreement over Sabadell's value led to the negotiations collapsing. The latest deal would see BBVA's total assets grow by almost 30% to more than €1 trillion, Market Intelligence data shows.

An expanded BBVA would join HSBC Holdings PLC, BNP Paribas SA, Crédit Agricole SA, Banco Santander SA, Barclays PLC, Société Générale SA, UBS Group AG, Groupe BPCE, Deutsche Bank AG, Crédit Mutuel Group and Lloyds Banking Group PLC as a European bank with more than €1 trillion in assets.

A combined BBVA-Sabadell entity would have about €800 billion less in total assets than Spain's largest bank, Santander, and €400 million more than the country's third-largest lender, CaixaBank SA.

The merger would position BBVA to challenge CaixaBank as Spain's largest domestic lender. BBVA would operate a Spanish loan book of about €280 billion compared to CaixaBank's €325 billion.

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"The combined entity would be very close to CaixaBank in size," Michael Christodoulou, bank equity analyst at Berenberg, said in an April 30 note. "A potential deal between the two banks could provide the combined entity with higher pricing power compared with the rest of the big banks in Spain."

BBVA would become Spain's largest domestic bank by total assets with an almost €640 billion balance sheet. This compares to CaixaBank's total Spanish assets of about €571 billion.

Both BBVA and Sabadell's shares have significantly outperformed the rest of the European banking sector since interest rates began to rise in Europe and the Americas, S&P Global Market Intelligence data shows. Sabadell, which had struggled in previous years, has particularly benefitted from the more favorable operating environment, boosting its total return by more than 240% since the beginning of 2022. Total return includes gains from increases in share price, proceeds from share buybacks and dividends.

BBVA, which has enjoyed strong revenue and profit gains in recent quarters in its two largest markets, Spain and Mexico, has delivered total return growth of 131% during the period. The Spanish banks' performances compare to a 47.6% increase in total returns for the S&P Europe BMI Banks index, which covers Europe's 58 largest publicly-listed lenders.

BBVA's and Sabadell's improved performance in recent quarters is also reflected in the banks' price-to-tangible book values, Market Intelligence data shows. Sabadell again has been the biggest beneficiary of the two as its price-to-tangible book value rose by more than 50 basis points to 83.15% since the beginning of 2022.

Still, Sabadell began the period from a much lower base of 32.36%, reflecting the bank's sustained underperformance in the previous years.

BBVA enjoyed an almost 40-basis-point increase in its price-to-tangible book value to more than 120% since the beginning of 2022.

During that time, the S&P Europe BMI Banks Index rose by less than 15 basis points to 110.25%. The index contains several banks whose share prices and dividends have not received the same boost from the higher interest rate environment as seen at lenders in Spain and other markets.