BBVA wants to buy Sabadell in what could be a $10 billion-plus acquisition. Here's why.

By Barbara Kollmeyer

Two of Spain's largest banks could again be in talks about a merger

It was a case of déjà vu in Spain on Tuesday as Banco de Sabadell said it had been approached by bigger rival BBVA about a potential merger - more than three years after discussions between the two banks broke down.

Shares of Sabadell (ES:SAB), Spain's fourth-biggest lender by assets, rose more than 6%, while those of BBVA (BBVA) (ES:BBVA), the country's second-largest bank, fell by roughly the same amount.

Sabadell said that it will "properly analyze" the proposal it received from BBVA, which said in statements to the Spanish regulator on Tuesday that it was "initiating negotiations to explore a potential merger transaction between the two entities" and had appointed advisers for a potential deal.

The announcements confirm a report earlier in the day from Sky News that Sabadell, which bought U.K. lender TSB from Lloyds in 2015, was a takeover target.

Sabadell's market capitalization of just over EUR10 billion (equivalent to $10.7 billion) pales in comparison to BBVA's EUR59 billion, and deal talks may be a case of tidying up some unfinished business.

In November 2020, discussions between the banks broke down, reportedly because BBVA wasn't willing to pay enough for the TSB arm, according to Reuters, which cited sources familiar with the situation.

Sabadell was in a much weaker position at that time, with profits tumbling in 2020 after the bank set aside billions of euros to deal with issues related to the pandemic. Earlier this month, Sabadell reported forecast-beating results and lifted its profit guidance for 2024.

BBVA, meanwhile, lifted its annual profit target after its own profit and earnings beat forecasts in results that it reported on Monday.

Spanish banks overall have been in a sweet spot, thanks to higher interest rates and a strong economy. S&P Global Ratings on Monday lifted its outlook to positive for six of the country's biggest banks, noting a significant improvement in profit in 2023, continuing what was seen in 2022.

"Although the sharp increase in interest rates certainly supported banks' performance, they also benefited from the lean operating structures developed through more than a decade of downsizing and significant consolidation, combined with tight control over funding costs," said S&P analysts led by Elena Iparraguirre.

The analyst added that Spain's economic "growth prospects are sound, and growth will outpace that of European peers." Data released Tuesday showed Spain was still the fastest-growing of the euro area's four biggest economies, thanks in large part to a tourism boom that has rebounded since the pandemic.

-Barbara Kollmeyer

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04-30-24 1034ET

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