Spain's BBVA 'resilient' to Turkish exposure

Spanish multinational bank Banco Bilbao Vizcaya Argentaria (BME: BBVA) will prove itself to be resilient to any shocks associated with deteriorating economic conditions in Turkey and a drop in the value of the country’s currency, according a leading rating agency. 

In a note to its clients on Wednesday (29 August), Moody’s said BBVA's credit profile will hold its own in the face of deterioration of the operating environment in Turkey, with any expected negative developments in the bank's Turkish subsidiary "being largely offset by the stronger performance of other of the bank's units, particularly its domestic business."

Based in its reasoning, the rating agency affirmed the long-term deposit and senior unsecured debt ratings of BBVA at A2 and A3 respectively, with a 'stable' outlook. At the same time, Moody's has affirmed the bank's baseline credit assessment (BCA) and adjusted BCA at baa2. Short-term deposits and programme ratings were affirmed at Prime-1 and Prime-2 respectively.

Earlier this month, Moody's lowered Turkey's rating followed by the downgrade of BBVA's Turkish subsidiary, Turkiye Garanti Bankasi (Garanti), along with other Turkish banks. 

“In the context of solid economic growth, asset risk in BBVA’s Spanish operations has dropped materially boosted by the sale of the bank's legacy real estate assets, which will also increase future profitability by lowering provisioning costs and curbing losses at the bank's real estate unit,” Moody’s noted.

The agency also said any negative impact from foreign exchange risk is limited as BBVA hedges regulatory capital and expected profit contribution. "Specifically, a 10% depreciation of the Turkish lira would have a minor impact of two basis points in the bank's CET1 capital and 50% of expected earnings for 2018 are hedged. 

"Moreover, in an extreme scenario in which BBVA lost its equity investment at Garanti, the impact on the bank's CET1 ratio at end of June 2018 (proforma following the sale of BBVA Chile) would be a decline of 34 basis points to 11.03%, which is still amply above its SREP requirement for 2018 (9.25%)."

Moody's likewise expects a limited impact in terms of liquidity and funding, with any contagion being limited by BBVA's internal policies, which stipulate that all subsidiaries must be fully managed locally and be self-sufficient in terms of liquidity. 

While recent market turmoil is likely to increase the pricing of wholesale funding, Moody's expects BBVA to have broad access to wholesale markets as has been the case in past stress episodes.