BBVA’s decision to open talks about selling its Chilean retail bank to Scotiabank could lead to a notable retrenchment of its Latin American operations.
BBVA has a large presence in Latin America, with significant banks in Argentina, Colombia, Mexico, Peru and Venezuela – as well as Chile where it is the country’s sixth largest.
However BBVA’s management has in the past indicated that it believes its Chilean retail bank – valued at around €1.2 billion – lacks sufficient scale. That has led analysts to believe that the bank would look to merge with another bank or sell. BBVA has a 68% stake in BBVA Chile, while 29% belongs to the Chilean Said family and the rest of the shares are in free float.
A combination of very high valuations for potential targets (an opportunity for an attractive sale price) and a new banking law that could require a capital injection may be behind BBVA’s apparent decision to sell. The bank is not understood to be looking to sell its consumer finance operation in the country.
Chilean banks have been trading at very high valuations for some time: as an average the NTM (next 12 months) is trading two standard deviations above the five year average of between 12.7x and 12.9x.
“This is a significant re-rating,” says a JPMorgan report on Chilean banks that concluded the high valuations in the Chilean market required downgrading Banco de Chile to neutral.
Chilean valuations certainly appear stretched in regional terms: Banco de Chile’s 14.3x and Santander Chile’s 15.1x expected 2018 P/E is above leading banks in Mexico (Banorte at 12.6x and Santander Mexico at 12.1x) Brazil (Bradesco at 10.8x, Itau at 11.0x and Santander Brasil at 10.6x) and Colombia (Bancolombia at 10.7x).
Meanwhile, the country’s new banking law that adopts Basel III requirements for Chilean banks has been presented to Congress. The Ministry of Finance estimates that the system will require an additional $2.7 billion of capital. The additional capital requirement is expected to be concentrated to a small number of banks and Moody’s suggests that the banks with the largest need for extra capital are BancoEstado, Itau, Corpbanca and BBVA Chile.
The law allows for a phasing in of the additional capital until 2024 and a sale of BBVA’s retail bank would pre-empt that requirement. BBVA may also have concluded that the valuations prevented them targeting another Chilean bank to build sufficient scale.
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