Shares of Banco de Sabadell dived 13% after merger talks with Banco Bilbao Vizcaya Argentaria’s (BBVA) fell apart as the two banks failed to reach an agreement on financial terms. US-listed BBVA shares rose 2.3% in Friday’s pre-market trading session.
In a statement, Sabadell (GB:0H00) said that its Board of Directors unanimously agreed to end talks with BBVA over disagreements on the exchange ratio of their shares. The two banks had earlier this month announced on-going deal talks which would have created Spain’s second-biggest domestic lender by assets.
In an SEC filing, BBVA (BBVA) stated that the talks over a “potential merger transaction with Sabadell have come to an end without having reached an agreement.” Meanwhile, Sabadell announced that it now plans to present investors with a new business plan in the first quarter of 2021, which will focus on its domestic operations to boost profitability and generate value organically. The plan seeks to “generate efficiencies using the group’s capital and resources, thereby increasing profitability and creating value for its shareholders.”
“Banco de Sabadell is prepared to say that it will launch a transformation programme in its retail banking business which will have a neutral impact on capital and generate more efficiencies in this segment,” Sabadell stated. “Sabadell will also analyse strategic alternatives for creating shareholder value with regard to the group’s international assets, including TSB.”
Sabadell believes that its footprint in Spain’s small and medium-sized enterprise (SME) segment will provide for a “highly profitable solid domestic franchise”.
Following the news, Keefe Bruyette analyst Daragh Quinn downgraded Sabadell stock to Sell from Hold and left the price target unchanged at €0.52.
Commenting on the deal fallout, CMC Markets analyst Michael Hewson said “The banking sector in Spain could do with some consolidation, and BBVA having only recently sold off its US operation, certainly had the cash to do a deal with Sabadell. BBVA has been one of the more prudent Spanish banks this year, setting aside up to €4b in respect of non-performing loans this year, as the coronavirus rages across Spain.”
“Sabadell is by far the smaller bank in terms of size and assets which makes the decision to call time on the discussions all the more puzzling. The bank has seen its adjusted net income shrink from €1b in 2016 to as little as €242m in the nine months to September, and is clearly struggling,” Hewson added.
Overall, Wall Street analysts are cautiously bearish on the stock. The Moderate Sell consensus shows 2 Sells vs. 3 Holds. With shares down 66% year-to-date, the average price target stands at €0.35, indicating another 13% downside potential lies ahead in the coming months.