BBVA Compass posts strong results for 4Q18 - we value its equity at $21B

December quarter earnings up 13% excluding one-offs

BBVA Compass has reported financial statements for the quarter and the year ending 31 December 2018. The December quarter net income available for shareholders reads $187 million growing 36% on the year or 7.9% QoQ. Like-for-like growth is a more modest 13% YoY as the 2017 income statement included a one-off tax charge due to a change in tax law. The company recorded $953 million in December quarter revenues.

The bank's full-year earnings set a record at $741 million in 2018. Compass delivered this earnings on the back of bank revenues which totaled $3.7 billion for the full year. The bank posted solid growth across most metrics breaking records in many. The overall balance sheet, loan originations, total banking income, operating income and earnings available for Compass shareholders all posted strong growth.

The total assets breached $90 billion mark as at 31 December and the balance sheet is well-funded.. Leverage and capital ratios have changed little. The LDR remained around 90% mark throughout 2018 and finishing the year at 90.0%. The bank is well-capitalized with its total capital ratio staying above 13% and the Tier-1 above 9% mark. The December quarter return on equity adjusted for calendar days is 6.00%, up from 5.59% in September. We calculate the return on assets at an annualized 0.85% for the quarter, up from 0.78% in September.

Credit quality metrics have somewhat upset. The non-performing assets ticked up to 0.90% as at 31 December 2018 from 0.76% as at 30 September 2018. Similarly, the 90 day delinquency ratio -reported as 90 days past due accruing loans as percent of total loans- rose to 0.9% in December from 0.7% in September. Both measures amount to significant spike in bad assets between September and January. However, the deterioration in asset quality has not come in as a huge surprise as we have seen similar worsening in credit at both money-center banks and online loan businesses across the U.S. in the fourth quarter. The moderation in Federal Reserve’s rhetoric on monetary policy may help the outlook for credit. However, potential charge-offs are probably among the sources of downside risk to March quarter earnings.

Equity value

BBVA acquired Compass at $9.1 billion at 2007 prices. We reckon Compass valuation today is considerably higher. We have attempted to value Compass equity using the bank’s financials and the management guidance. There are two sources of risk to our valuation. First, it is not easy to isolate Compass equity from that of the Group and form a “Compass-only” opinion on valuation. Second, Compass has operations in Southern U.S. states with exposure to Mexico and northern countries of South America, all of which have strong prospects for growth, which our methodology may fail to address fully. Compass generated a year-average ROE of 6.03% in 2018. We expect Compass to generate ROE within 6-6.5% range for the foreseeable future. We factor in moderation in US yields with the the long-end of the yield curve shifting down. We have charged 4.25% and valued Compass equity at $20.9 billion, our base case, consistent with a PBR of 1.66x on 31 December 2018 book equity. Our valuation range is $19.7 billion to $22.0 billion.

About BBVA Compass

BBVA Compass operates 644 branches, which include 331 in Texas (77 in Houston), 89 in Alabama, 63 in Arizona, 61 in California, 45 in Florida, 37 in Colorado and 18 in New Mexico. BBVA Compass has become the fourth largest bank in Greater Houston area by deposits. BBVA Compass is owned by the Spanish financial services group BBVA. BBVA Group entered the U.S. banking market in 2004 acquiring several banks in California and Texas. Compass was one of those banks.