Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

U.S. credit conditions have never been better, Jamie Dimon said this week. Donald Trump has hailed a "new chapter in American greatness." American bank shares are at their highest since 2007, and the dollar is riding high on hopes of more interest-rate hikes.

It seems strange, therefore, to see a small European bank say "adios" to the Trump trade.

Spain's Banco de Sabadell SA (market value $9 billion, or about one-thirty-fifth of JPMorgan) agreed on Wednesday to sell its U.S. consumer operation to rival Iberiabank for $1.03 billion in cash and stock.

It will keep a toehold Stateside through its corporate lender -- and its new stake in Iberiabank -- but it's still giving up a chunky $4.2 billion in loans and $5.2 billion in deposits. At the same time, Sabadell is expanding in Mexico, where the peso has taken a beating from Trump's talk of barriers both commercial and concrete. Sad!

Gracias
Shares of Sabadell jump after an agreed sale of its U.S. retail business
Source: Bloomberg
Intraday times are displayed in ET.

But it's probably the right decision. Sabadell's investment in U.S. consumer banking has had a good run since 2007, and the money could probably be better spent elsewhere. With valuations in the financial industry leaving so little room for disappointment, now may be the right time to cash out. 

The sale frees up precious capital that can help fill cracks in Sabadell's balance sheet. The bank's capital ratio would in theory rise to about 13 percent, from 12 percent, thanks to this deal. That may be useful given the lender is hobbled with bad loans. Analysts at Kepler estimate the company may have to make further 2 billion euros of provisions.

Capital Cracks
Sabadell compares unfavorably to rivals in terms of tangible common equity ratio
Source: Bloomberg Intelligence

A stronger balance sheet might also allow Sabadell to expand market share in the U.K., where the Spanish lender already owns TSB. Bloomberg Intelligence's Jonathan Tyce reckons a bid for Co-Operative Bank Plc would allow Sabadell to cut its funding costs, something that could offer a competitive leg-up.

And betting on Mexico may not be as wrong-headed as it sounds. Yes, the economy is clearly vulnerable to Trump-related risks. Any disruption to trade would be a big hit for Mexico and its neighbors. But lenders seem to be taking it in their stride for now. Sabadell's rival Banco Bilbao Vizcaya Argentaria SA said it was "very optimistic" on Mexico as it reported a jump in fourth-quarter operating profit. And just as Trump's rhetoric on deregulation may not match up with reality, currency markets have also helped the Mexican peso bounce back on hopes that his administration's vision for trade will not be as punitive as feared.

Trump Bump? No Problem
The Mexican peso has rebounded from its drubbing
Source: Bloomberg data showing spot return between 01/03/17 and 03/01/17, base USD.

Sabadell is, in a way, licking its wounds rather than beating a victorious retreat. Trump still has big banking cheerleaders like Gary Cohn on board. But it would be ironic indeed if a small Spanish bank cashed out of the Trump trade at just the right time. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net