UPDATE 3-Spain's BBVA plans $3.2 bln share buyback, dividend payouts

* BBVA’s share buyback equivalent to about 2.6 bln euros

* Shares fall after lower than expected lending income

* Q4 net profit 1.32 billion euros, above forecasts

* Reported capital rises by 21 basis points in quarter

* Bank to announce cost-cutting plan in Spain in H1 (Adds shares, comments from CEO on cost-cutting plans, M&A, broker comment, details on NII and Mexico)

MADRID, Jan 29 (Reuters) – BBVA plans to buy back of around 10% of its shares, worth about 2.6 billion euros ($3.2 billion), after the sale of its U.S. business, the bank said on Friday.

Spain’s second-biggest bank announced the sale of its U.S. business for $11.6 billion to PNC in November, and signalled it could use part of the proceeds on a sizeable share buyback and dividend payments.

BBVA had also been in merger talks with smaller rival Sabadell but these were called off in November after a failure to agree on price.

The bank also said it planned to a pay a gross cash dividend of 0.059 euros per share on 2020 profits and return to its policy of distributing 35-40% of profits to shareholders in 2021, in line with European Central Bank (ECB) guidance.

The ECB gave recommendations on dividends and share buybacks in December, seeking to ensure banks have the resources to cope with a tough economic backdrop.

BBVA said its planned buyback and dividend policy were both subject to market conditions and regulatory approvals.

The bank said the sale of its U.S. business, expected to complete in mid-2021, would put its pro-forma fully loaded core-tier capital ratio, the strictest measure of solvency, at 14.58% at the end of December 2020.

The reported capital ratio increased in the quarter by 21 basis points to 11.73%, prompting the lender to increase its capital ratio target to 11.5%-12% from 10.84%-11.34% previously.

Shares in BBVA fell 1.6% as brokers such as Merrill Lynch had been expecting a bigger share buyback of 13%.

Another broker KB&W said BBVA’s planned buyback programme did not dissipate merger options.

BBVA’s CEO Onur Genc told analysts any “availability of excess capital” would not force the bank to automatically undertake an acquisition, which should be based on creating value.

Jefferies highlighted a deterioration in asset quality in Mexico, BBVA’s main market, to 3.33% from 2.36% in the fourth quarter of 2019.

To cope with the COVID-19 pandemic and a change in customer habits, BBVA’s CEO told analysts it was planning to announce cost-cutting measures in low-growth geographies, especially in Spain, in the first half of the year.

BBVA booked a net profit of 1.32 billion euros in the fourth quarter, from a loss in the same period in 2019, but its net interest income, earnings from loans minus deposit costs, fell 14.2% in the quarter to 4.04 billion, slightly below market forecasts of 4.1 billion euros.

Full-year net profit fell 63% due to provisions to cover the economic fallout from the coronavirus pandemic, including a 2.08 billion euro goodwill adjustment in the United States.

Banks across Europe are under pressure from rising bad debts and record low interest rates. On Friday, Spain’s Caixabank reported a 19% decline in 2020 net profit.

For 2021, BBVA said it expected its cost of risk, which measures the cost of managing credit risks and potential losses and can indicate future provisions, to remain below 2020 levels. The bank ended the year with a cost of risk of 151 basis points, at the lower end of its 150 and 160 bps guidance for the year.

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