Shares of CaixaBank (OTCPK:CAIXY)(OTCPK:CIXPF) have done well since I first covered them with a 'Buy' rating roughly 12 months ago, significantly outperforming broader European financials (EUFN) with a ~55% total return in that time.
CaixaBank has been one of the biggest beneficiaries of rising Eurozone interest rates. Driven by supportive macro factors, net interest income ("NII") growth has surpassed both analysts and even C-suite expectations, leading to increased near-term guidance.
While CaixaBank continues to over-earn, income now appears to be peaking, and with the shares trading for around 1.3x tangible book value they no longer offer the strong upside they did last year. As such, I downgrade the stock to 'Hold' following its strong recent run.
A Favorable Macro Environment
To quickly recap, CaixaBank is a predominantly domestic-focused Spanish bank. While it does have a presence across the Iberian Peninsula, operations in Portugal only contributed around ~11% of the roughly €1 billion that the bank earned in net income last quarter.
CaixaBank has been one of the biggest beneficiaries of rising interest rates in the Eurozone. This is down to a number of factors. Firstly, the bank's funding profile skews heavily to low-cost deposits, with customer demand balances totaling €325 billion at the end of Q1.
Secondly, market conditions in Spain remain largely favorable for banks. When I covered CaixaBank a year ago, the regional bank crisis in the U.S. was still ongoing, with regional lenders having to compete aggressively on pricing in order to stem deposit outflows. Spain has essentially seen the opposite dynamic: systemwide liquidity has remained ample, with relatively little funding cost pressure being the result. To be clear, headwinds like deposit migration and higher yields on saving accounts have been present, but they have proved more benign than many anticipated. Indeed, Caixabank's deposit beta was still only at 19% as of Q1, whereas management had previously expected it to hit 20% by the end of 2023. Said differently, the bank has outperformed even management's own guidance in terms of funding costs.
Thirdly, CaixaBank's lending profile skews largely to floating rate loans, with these currently comprising around 70% of the loan book. That means a large portion of its loans have repriced quickly to the higher rate environment, leading to strong expansion in asset yields. Taken together, these factors have not only led to a large expansion in CaixaBank's net interest margin ("NIM"), but NIM has continued to expand even as many other banks saw their NIMs peak last year. This has also led management to upgrade NII guidance. Whereas previously 2024 NII was seen roughly flat year-on-year at €10.1 billion, it is now expected to grow by mid-single-digits.
Credit quality likewise remains supportive of earnings. Despite several quarters of elevated interest rates, non-performing loans remain relatively stable at around 2.8% of total loans, with that figure still near recent historical lows. At the same time, CaixaBank's loan reserves remain above recent historical levels, with its NPL coverage ratio standing at 71% in Q1, around 13ppt above its 2014-2022 average. This combination is keeping impairment charges down, with annualized cost of risk landing at 28bps in Q1, slightly below management's 2024 target of ~30bps.
Taken together, these developments have resulted in a sharp improvement in CaixaBank's profitability. In Q1, the bank earned circa €935 million in net income after accounting for AT1 coupon payments. With Q1 average tangible equity of €31.7 billion as I calculate it, CaixaBank delivered a strong annualized ROTE of 12% last quarter. This would be impressive enough on its own, but note that Q1 absorbs the full cost of Spain's windfall banking tax, which was a circa €500 million headwind to CaixaBank last quarter. Annualizing this figure would push ROTE comfortably into the mid-teens as I calculate it. Note that between 2014 and 2021 (i.e. when the Eurozone base rate was negative), CaixaBank only averaged a mid-single-digit ROTE.
The Outlook
While CaixaBank continues to report strong earnings, income is probably peaking at this point. Funding costs will continue to creep higher, while asset repricing and loan growth will prove challenging from their respective levels. Eurozone interest rate cuts are also on the horizon, with the forward curve pointing to around 50bps this year followed by a further 75bps of cuts in 2025.
As NII was up 27% year-on-year in Q1, this won't have a big effect on the full-year 2024 comp; indeed, management expects NII to grow this year as per above. With that implying around €10.6 billion for the full-year, I see 2024 net income at around €5 billion after AT1 coupon payments.
However, this does mean that quarterly comps will get tougher over the rest of the year, ultimately leading to a mid-to-high single-digit decline in NII in 2025. As NII is currently around 70% of CaixaBank's top line, I expect this to lead to a ~10% fall in 2025 net income (to around €4.50 billion), followed by a more modest ~4% decline in 2026 as rate cuts taper off. All told, over the 2024-2026 period, I estimate CaixaBank will generate cumulative net income of roughly €13.8 billion after AT1 coupon payments.
In terms of balance sheet growth, CaixaBank's tangible book value should largely track the low single-digit annualized growth of the Spanish economy, while on a per-share basis this will be boosted by the share buyback component of management's capital returns plans.
Management's payout policy calls for 50-60% of net income to be paid out by way of cash dividends, with recent payouts skewing toward the higher-end of that range. I thus expect ~€8.3 billion in cumulative dividend payments over this period, with around €2.5 billion retained to fund growth. This leaves around €3 billion for stock buybacks, equivalent to circa 8% of CaixaBank's current market-cap. From the year-end 2023 figure of €4.20 per share ($1.52 per ADS), this gets me to a target of 5% annualized growth in TBVPS out to 2026.
In terms of the per-share dividend, buybacks will help cushion the fall from falling net income. As a result, I pencil in a DPS of ~€0.43 in respect of 2024, followed by roughly €0.80 per share cumulatively in respect of the 2025-2026 period.
Valuation
CaixaBank shares currently trade for around €5.08 ($1.84 per ADS), equal to just under 1.3x tangible book value per share ("TBVPS") as of Q1 2024. This leaves the shares looking fairly expensive, as I expect medium-term stock returns to be pressured by a contraction of this multiple.
Going into a little more detail, total returns for bank stocks can basically be broken down into three components: growth in TBVPS, the terminal multiple applied by the market to TBVPS, and finally, the sum of cumulative cash dividends paid out.
The first and third components have been outlined above, leaving an estimate for the market's terminal TBVPS multiple remaining. As net income falls, so too will ROTE, declining to just under 13% in 2026 on the above numbers. This still clears the 11% cost of equity I assign to CaixaBank, meaning the stock should still trade at a premium to TBVPS, though I see this contracting to around 1.1x from 1.3x currently. This ultimately results in a three-year share price target of €5.35 (~$1.94 per ADS), rising to a pre-tax total return price of just under €6.60 ($2.38 per ADS) including dividends. As this points to sub-10% pre-tax annualized returns from the current quote, further upside now appears limited. As such, I downgrade CaixaBank to 'Hold' following its strong recent run.
Risks
Risks to the above include a more resilient top line, particularly in respect of NII. Although I consider it unlikely, systemwide liquidity could remain ample, further easing funding cost pressure, while rate cuts may fail to materialize as implied by the forward curve. Similarly, near-term loan impairment charges could land below management's 30bps guidance, boosting net income, although this again seems unlikely at this point in the economic cycle.
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Mark Dockray
I like to take a long term, buy-and-hold approach to investing, with a bias toward stocks that can sustainably post high quality earnings. Mostly found in the dividend and income section. Blog about various US/Canadian stocks at 'The Compound Investor', and predominantlyUK names on 'The UK Income Investor'.
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