By Elena Vardon

CaixaBank forecast weaker profitability over the next three years as falling interest rates and heavier costs eat into its margins.

Spain's largest bank by domestic assets expects a return on tangible equity--a key measure of profitability--of more than 16% by the end of 2027, it said Tuesday as part of an investor day outlining medium-term goals.

The lender is targeting a return of more than 15% on average for each year in the 2025 to 2027 period. This compares with its 2024 target of more than 17% and the 16.9% return reported for the third quarter.

Lending growth is now past its peak and the benefit of higher interest boosting the coffers of European banks in the past two years rates is tapering off as central banks trim lending rates. Investors have thus been seeking reassurance on how lenders can maintain such levels of profitability.

CaixaBank forecast a slowdown in net interest income--the difference between what banks earn on loans and pay clients for deposits--saying it aims to keep net interest income stable by the end of the period. However, the group expects revenue to grow by low-single-digit percentages each year over 2025 to 2027.

This will be driven by mid-single-digit growth in revenue from services such as wealth management, protection insurance and banking fees, which are set to compensate the fading tailwind of a high-rate environment.

CaixaBank said it forecasts annual growth of around 4% in its loans to companies and households, and in customer funds over the period. This, along with support from hedges it has in place, led it to forecast a net interest income over the course of the new plan that is flat on 2024's more than 11 billion-euro ($11.6 billion) target.

"In the next three years, we want to take advantage of a more favorable economic environment to take a leap forward in our service quality, in our technological capabilities and in the development of our workforce's talent," Chief Executive Gonzalo Gortazar said.

The lender also guided for 4% annual growth in costs, bringing its expenses to around 6.9 billion euros by 2027, against its around 6.1 billion euro target for 2024. It intends to invest more than 5 billion euros in technology over the period and to hire around 3,000 young people with technical skills.

The plan confirms CaixaBank is a bank with a high return on tangible equity and low sensitivity to rates, Keefe, Bruyette & Woods analysts wrote in a note to clients. On average, European banks' estimates on the metric for this year and the next two stand at around 14%, according to Jefferies analysts' calculations using FactSet data.

The bank had 4,130 branches and 45,718 employees at the end of September. This is a relatively expensive network by Spanish standards even considering its leadership in market share, according to Deutsche Bank analysts.

In terms of shareholder returns, CaixaBank kept its commitment to pay out between 50% and 60% of net profits in dividends and to return any excess capital if its common equity tier 1 ratio surpasses 12.5%, compared with 12.0% previously. It guided for a CET1 ratio in the 11.5% to 12.5% range for the three-year period.

KBW analysts pointed out that the market might take time to fully digest the presentation as the capital-distribution targets are now less clear. For the 2022 to 2024 plan, it had given an initial firm target of 9 billion euros, which was later upped to 12 billion euros.

Shares traded 2.6% lower at 5.54 euros in European morning trade. The stock has gained almost 50% since the start of the year.

CaixaBank's largest shareholders are Criteria--a holding company for "La Caixa" Foundation--with a 31.2% stake, and the Spanish government, which owned 17.9% of the lender as of Sept. 30.

Write to Elena Vardon at elena.vardon@wsj.com

(END) Dow Jones Newswires

November 19, 2024 05:06 ET (10:06 GMT)

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