BBVA's Modest Q4 Profit Growth Fails to Offset Elevated Valuation and Execution Risks

What happened

BBVA reported a 4.1% year-over-year increase in Q4 net profit, driven by solid performances in Spain and Mexico, as highlighted in the recent Reuters article. However, this growth follows a 137% stock price rally over the past year, which has compressed valuation-based upside, with the stock trading at ~11x P/E and ~2.0x P/B according to the DeepValue master report. The report emphasizes persistent execution risks, including Mexican peso volatility and credit quality concerns, which could jeopardize BBVA's ambitious €48 billion profit and €36 billion distribution targets for 2025-28. Despite the positive quarterly results, DeepValue maintains a WAIT rating, advising investors to seek a better entry point near $20 or after clearer evidence of sustained delivery. Therefore, while the profit increase underscores operational resilience, it does not materially reduce the heightened risks from emerging market exposure and aggressive capital returns.

Implication

Investors should interpret the Q4 results as a sign of BBVA's ability to generate steady profits under current conditions, yet the stock's premium valuation leaves minimal margin for error amidst macroeconomic uncertainties. The DeepValue report's base case target of $26 suggests limited upside from current levels, while the bear case of $20 highlights significant downside if Mexican cost of risk rises or FX headwinds intensify. Key monitoring points include the impact of the €3.96 billion buyback on CET1, trends in Mexico's credit quality, and MXN stability, all critical to sustaining the bank's high-ROTE model. Consequently, awaiting a pullback to around $20 or another year of demonstrated progress on profit and distribution goals offers a more favorable risk-adjusted entry. Overall, the news does not justify new investments at today's prices but underscores the importance of disciplined risk assessment in volatile banking sectors.

Thesis delta

The Q4 profit increase does not alter the core investment thesis, which remains centered on execution risks in Mexico, FX volatility, and valuation concerns after the stock's significant run-up. However, it provides a short-term validation of operational efficiency, potentially supporting the bull case if sustained, but any material shift would require consistent delivery on financial targets and stable credit metrics over multiple quarters.