Turbulence in the Turkish lira is thwarting BBVA’s success in what was once a promising market

Cryptocurrency trading has seen a boom in Turkey recently as investors try to protect themselves from inflation and the weakening lira.
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The rapid weakening of the Turkish lira is weakening the strong business development of Banco Bilbao Vizcaya Argentaria SA in its third largest market, although the Spanish banking giant has hedged itself significantly against the currency’s devaluation in 2021.

The sharp decline in the lira, which is down more than 28% against the US dollar this year, is hurting the returns of several foreign lenders who have invested in Turkish banks.

BBVA has the largest market exposure of all foreign lenders through its 49.85% stake in Turkiye Garanti Bankasi AS. The Madrid-based lender has hedged against currency devaluation in several emerging markets in which it operates in 2021, with 70% of expected annual results protected in Turkey.

However, the deteriorating outlook for the lira means that BBVA will likely have to extend its positions beyond their current settlement dates, adding fees and limiting the benefits of the process, according to Stefan Nedialkov, director at Citigroup Global Markets.

However happens by doing [foreign exchange] Market, you can hedge as much as you want, but at some point reality will catch up with you because you have to overcome those hedge, “said Nedialkov.

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The lira fell to a record low on October 22nd after Turkey’s central bank cut interest rates by 200 basis points, a sharper cut than markets expected. The currency fell more than 2% in the hours following the ruling, trading at 9.51 lira against the dollar at 6:00 a.m. London time.

Monetary policy uncertainty

The central bank’s decision follows President Recep Tayyip ErdoGDismissal of three central bank officials on October 12th. The layoffs have been viewed by the president as a push for further rate cuts which he believes would spike inflation if it were too high, a view widely disapproved by economists. The current central bank governor is the fourth in less than two years.

The uncertainty hit BBVA’s investment twice. In addition to the lira’s 28% plunge against the dollar and 22% decline against the euro, Garanti’s share price has fallen 13% since early 2021, compared to a 3% decline for the broader Turkish BIST 100 index.

“If I became a guarantee shareholder, I would not being even happy Above it “so Batuhan Ozsahin, chief strategist at the Turkish asset manager Ata Yatirim Securities. “Asa foreign investor you’re Low 41% this year [in dollar terms]. The value from BBVAs investment Has did bad.”

BBVA’s strategic commitment to Garanti and Turkey has not changed and it is “comfortable” with its 49.85% stake, the bank said in an email statement.

BBVA’s deteriorating overall earnings come from Turkey, according to Ozsahin, despite the fact that Garanti is one of the strongest lenders in the country.

“[It] is a very well managed Bank and it is in one great position there it Has been Run very hardworking for someday, “said Ozsahin.

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For several years, Garanti has been Turkey’s largest bank in terms of capital, as data from S&P Global Market Intelligence show. As of June 30, the core capital ratio of core capital was 14.00%, 234 basis points above the average of the five largest listed lenders in the country.

The non-performing loan ratio was 3.98% in the second quarter, below the five largest banks’ average of 4.18%. In the eleven years since BBVA acquired a stake in Garanti, the NPL ratio peaked at 6.82% in 2019, 55 basis points above the average of the five banks for this year, following a currency crisis in the country the previous year.

Turkey’s BBVA operating profit and pre-tax profit have increased in lira since 2016, but the depreciation of the lira has caused them to decline sharply in euros. For 2020 the operating profit was 3.6 billion euros after 4.3 billion euros in 2016. In the first half of 2021 it was 1.6 billion euros.

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“The underlying Companies is Strictly speaking dress up good, “said Nedialkov.It is that [forex] Translation that affects profits and book values. “

Nedialkov estimates that the BBVA share will lose every 10% of the value of the lira against the euro “could fall theoretically from 2% to 2.5%. “This impact can be influenced by currency hedging and other factors.

Emerging markets

Turkey is BBVA’s third largest market by total assets after Spain and Mexico, and contributed the second largest share of the company’s pre-tax profit at more than 30% in 2020, according to Market Intelligence data. BBVA’s exit from the US retail banking market in 2020 made the bank even more dependent than before on emerging markets.

“This is the nature from as an emerging market bank“Said Nedialkov.Some from the Emerging market bets work really well, Other neither.”

The sale of BBVA’s US retail banking business for $ 11.6 billion 14.37% in the second quarter from 12.15% at the end of 2020. The bank uses its improved position to Share buyback of up to 10% of its outstanding capital, but it has been M&A since it sold the US business, especially when it got in Talks about the takeover of Banco de Sabadell SA in the weeks following the sale.

BBVA should use the excess capital for investments that could offset the volatility of its Turkish business, Nedialkov said.

“The best strategy would be to develop additional sources of profit, including domestically in Spain, to offset the decline in Turkish profits in euros,” said Nedialkov.

As a turnaround in the lira’s fortunes is becoming increasingly unlikely, it is positive for BBVA that Garanti is self-financed, said Ozsahin. “Perhaps the consolation is … that at least you don’t have to invest any extra money. That could be a black hole.”

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