Valuation Method and Risk Statement

Research evidence excerpt

Valuation Method and Risk Statement

Banks are exposed to a wide range of risks, including credit and interest rate risk, and

exchange rate volatility. They are also regulated, and, in recent years, regulatory changes have

been sweeping and somewhat unpredictable. We also note climate-specific and other ESG

related tail risks at sector level. We generally value the banks based on a one-stage Gordon

growth model or a divisional sum-of-the-parts approach.

BBVA:

BBVA: We have used a SOP methodology for valuation. We are advocates of ROTE being the

main driver for valuation multiples. We clean profits from non-recurrent items and deduct

AT1 coupons to get to our adjusted returns. COE used for BBVA is c13%. We use a 12.5%

fully loaded CET1 threshold to determine whether banks have excess or shortfall of capital,

and value that at the operating units’ PTBV. Risks: BBVA, as a financial entity, is exposed to

macro risks, unexpected changes in interest rates, developments in emerging markets, risk

from insurance activities, and potential M&A activity with positive or negative implications for

minority shareholders.

Santander:

Valuation: We have used the traditional Gordon growth methodology for valuation. We are

advocates of ROTE being the main driver for valuation multiples. We clean profits from non-

recurrent items and deduct AT1 coupons to get to our adjusted returns. COE used for SAN is

c12%. We use a 12.5% fully loaded CET1 threshold to determine whether banks have excess

or shortfall of capital, and value that at 1x PTBV. Risks: SAN, as a financial entity, is exposed to

Caixa Bank:

CAIXABANK

We use the traditional Gordon growth methodology for valuation. We are advocates of ROTE

being the main driver for valuation multiples. We clean profits from non-recurrent items and