BBVA - Sabadell; equity prices are moving to imply increasing deal likelihood, indicative of what risk arb capital is thinking. If this kicks off European consolidation (a big “if”), we try to identify some targets and see Italy, UK, Denmark and distressed lenders as areas to examine.

• Sabadell (SABSM: BBB+ pos) spreads tightened near-10bp yesterday (€IG banks tightened <1bp) and BBVA (BBVASM: A3/A/A-) actually tightened marginally, too.
• BBVA was certainly reticent at its recent results about outlining plans for its deployment of surplus capital and this deal would have good industrial logic, assuming competition concerns don’t arise. This is two of Spain’s top 5 banks getting together to close on Caixabank’s leading market share in deposits.
• Direct implications: this deal would mean BBVA’s reported interest in BCP would likely end, leaving the field clear for the other reported bidder, Caixabank (CABKSM: A3/A- pos/A-). This would likely infer risk of spread widening for CABK but that’s not the experience we’ve seen (so far) in this BBVA situation.
• Second order effects: there is a chance this changes the calculus for bank mgmt teams of equity buyback vs. inorganic growth. BNP is buying Fosun’s stake in Ageas already. Unicredit has upped its stake in Alpha in Greece. Barclays has bought assets from Tesco Bank and is reportedly looking at Goldman’s GM cards business. Looking simply at smaller banks in markets less concentrated than Spain, we see:
  • smaller Italian banks (Credito Emiliano, BP Sondrio, BMPS, BPER and even BAMI)
  • a range of the UK building societies (including Yorkshire BS in the €IG index)
  • the smaller Danish banks (Sydbank, Jyske, even Nykredit)
  • distressed lenders such at PBB, Aareal, Raiffeisen (for the truly bold)