Abanca Corporacion Bancaria S.A

The stable outlook indicates that we expect Abanca's operating profitability and efficiency to gradually improve over the next 18-24 months as the bank focuses on extracting further value from its recent acquisitions and benefits from rising interest rates. We expect its return on equity (ROE) could improve to 8%-9% in 2024, from 4.8% in December 2022. Although some asset quality deterioration from the slowing economic growth environment and high financing costs could yet emerge, these should be manageable, allowing credit provisions to remain at 40-50 basis points (bps) of average loans. Capitalization should remain solid, with the RAC standing at 9.3%-9.8%, providing some buffer for modest inorganic growth. We do not incorporate any acquisitions in our forecast beyond the integration

...Abanca's scale is more limited and its business more concentrated relative to higher-rated peers. With 35% market share in loans, the bank holds a sound franchise in its home market of Galicia and management has demonstrated its ability to integrate smaller entities over the past few years. Despite improving earnings capacity and gradually enhancing its diversification, Abanca remains more geographically concentrated than other domestic players, rendering it more vulnerable to competitive pressures. We expect profitability will improve, but remain below its cost of capital. Its limited scale at a national level and lower capacity to dictate prices make it more difficult for Abanca to dilute its fixed costs. We think that Abanca will continue to show some competitive differences compared with more diversified and larger Spanish players, despite its ongoing digital transformation, that support its efficiency....

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