Banco Bilbao Vizcaya Argentaria SA's operations in Turkey are set to suffer from U.S. tariffs and other geopolitical turbulence, with the country's currency dropping more than 40% since the beginning of 2018. But the ructions should not seriously dent its capital levels or lead to a strategic overhaul, according to analysts.
BBVA is headquartered in Spain but derives the bulk of its revenues from its foreign operations. In 2011, it acquired a 25% stake in Turkey's third-largest bank by assets, Türkiye Garanti Bankasi AS, and has subsequently raised its holding to just under 50%. Turkey accounted for €1.92 billion, or 16%, of BBVA's gross income in the first half of 2018, making it one of its main markets as it seeks to take advantage of strong lending growth.
According to S&P Global Market Intelligence data, aggregate loan growth stood at 20.95% in 2017, up from 18.21% in 2016.
But the bank's Turkish ventures have left investors cold and played into a 14% drop in the bank's share price over the month of August.
The Turkish lira has lost more than 40% of its value against the dollar since the beginning of the year, hit by attempts by President Recep Tayyip Erdogan to exert greater control over monetary policy and a move by U.S. President Donald Trump to double tariffs on steel and aluminum imports from Turkey.
"The decrease in the lira, once you convert it back to euros, is going to be a bit of a problem to [BBVA's] profitability," Tom Kinmonth, fixed-income strategist at ABN AMRO, said in an interview.
"But I don't think it is something that is going to impact solvency at this point," he said.
If the economic situation continues to worsen in the coming quarters, BBVA is likely to see a spike in loss loan provisions and a deterioration of asset quality in Turkey, DBRS analyst Maria Rivas said in an email. She noted that first-half provisions had risen by about €200 million, or 7.7%.
The nonperforming loans ratio at Türkiye Garanti Bankasi AS, also known as Garanti Bank, increased to 3.5% in the second quarter, from 2.75% a year previously, S&P Global Market Intelligence data shows.
Rivas said, however, that the banking group should be able to offset weaker asset quality in Turkey by its ongoing reduction of NPLs in Spain, where the NPL ratio fell to 5.2% at the end of the second quarter from 5.4% at March 31.
Like many Spanish lenders, BBVA has been offloading bad real estate loans inherited from Spain's property boom and bust in the 2000s. It will close a deal to sell most of its Spanish real estate business to Cerberus Capital Management LP for €4 billion in the third quarter.
BBVA CEO Carlos Torres Vila told analysts following publication of the lender's second-quarter results that he expected an increase in provisions and estimated that the bank's cost of risk in Turkey would rise to more than 150 basis points in the second half of 2018 from 123 basis points in the first half.
The CEO said the bank has taken various measures to offset economic risks in Turkey, including reducing its foreign-currency loans, diversifying its funding sources and lending prudently to corporates, but that the Turkish economy was growing too rapidly and needed to be contained by tighter fiscal and monetary policy to ensure more sustainable growth.
In comments published in El Economista on Sept. 6, he said profits would be lower but that there was a low risk of contagion in other parts of the bank.
Rivas said that while BBVA had hedged 50% of its expected earnings for 2019, there was a risk that that may not be enough, which would negatively affect the group's capital position.
She said the lira's fall had shaved 1.9 basis points off the group's total capital at the end of the first half. But any impact from the turmoil in Turkey on the bank's capital ratios should be "manageable," she said. Rivas also said she expected the bank to remain in Turkey given the depth of its investment there.
Kinmonth said the bank was suffering more from the ups and downs of an emerging market, with politics weighing more than economic fundamentals, and that investor sentiment toward Turkey could change very quickly.
"Next year we will see what occurs, but you are still in an emerging economy, loan increases have been very positive over the last few years, so there are still a lot of positives in the economy," he said.
"The big scary point is FX reserves, how much foreign money flows into the country, which is more in tune with the politicians and what their views are," Kinmonth said.
"Whether it washes out will be determined by politics ... the actual fundamentals of loan growth and defaults, mortgages and jobs are quite stable."
BBVA, which also has operations in Mexico and Latin America, would certainly look at the "risk-reward" of staying in the country and potentially shift operations to South America if it thought the longer term returns would be higher," Kinmonth said.
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