Turkish Lira turmoil thwarts BBVA’s success in once promising market

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Cryptocurrency trading has exploded in Turkey recently as investors seek to hedge against inflation and the weakening pound.
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The rapid weakening of the Turkish lira dilutes the strong performance of Banco Bilbao Vizcaya Argentaria SA’s business in its third market, despite the fact that the Spanish banking giant has hedged considerably against the depreciation of the currency in 2021.

The sharp decline in the pound, which has fallen more than 28% against the US dollar this year, is affecting the returns of several foreign lenders who have invested in Turkey’s banking sector.

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 the currency’s depreciation in 2021 in several of the emerging markets in which it operates, with 70% of expected annual results in Turkey protected.

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

No matter come in the [foreign exchange] market, you can cover whatever you want, but the reality eventually catches up with you because you have to go over these covers, ”Nedialkov said.

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The pound fell to a record low on October 22 following a 200 basis point cut in interest rates by Turkey’s central bank, a larger cut than markets expected. The currency fell more than 2% in the hours following the decision, trading at 9.51 lira to the dollar at 6:00 am London time.

Monetary policy uncertainty

Central bank move follows President Recep Tayyip Erdogthe sacking of three central bank officials on October 12. The layoffs have been seen as an incentive by the president to cut rates further, which he says pushes inflation up if it’s too high, a view widely rejected by economists. The current central bank governor is Turkey’s fourth in less than two years.

The uncertainty has dealt a double blow to BBVA’s investment. In addition to the pound’s 28% drop against the dollar and 22% drop against the euro, the Garanti share price has fallen 13% since the start of 2021, compared to a decline. 3% for the broader Turkish BIST 100 index.

“Yes I were a Guaranteed shareholder, I would not to be too much happy In regards to she “, according to Batuhan Ozsahin, chief strategist of Turkish asset manager Ata Yatirim Menkul Kiymetler. “Aher foreigner investor you are beautiful down 41% This year [in dollar terms]. The value of BBVA investment To ended poorly.”

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 emailed statement.

The deterioration in BBVA’s total returns from Turkey is due to the fact that Garanti is one of the strongest lenders in the country, according to Ozsahin.

“[It] is a very well managed bank and it’s in a Great position because this To summer Course very diligently to awhile, ”Ozsahin said.

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Garanti has been Turkey’s best-capitalized large bank for several years, according to data from S&P Global Market Intelligence. Its core Tier 1 ratio was 14.00% as of June 30, 234 basis points higher than the average of the five largest listed lenders in the country.

Its NPL ratio was 3.98 percent in the second quarter, lower than the average of 4.18 percent for the top five banks. In the 11 years since BBVA bought a stake in Garanti, its NPL ratio peaked at 6.82% in 2019, 55 basis points above the five-bank average for this year, following of a currency crisis in the country the previous year.

Turkey’s BBVA operating profit and pre-tax profit have climbed in sterling since 2016, but the depreciation of the pound has meant that in euros it has fallen sharply. For 2020, the operating result amounts to 3.6 billion euros, compared to 4.3 billion euros in 2016. For the first half of 2021, this figure was 1.6 billion euros.

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“The underlying Business is Actually look pretty well, ”Nedialkov said.It’s the [forex] translation that has an impact on profits and book values. “

Nedialkov estimates that for every 10% drop in the value of the lira against the euro, shares of BBVA “could fall theoretically through 2% To 2.5%. ”This impact may be affected by currency hedging and other factors.

Emerging Markets

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

“This is the nature of be an emerging market bank“said Nedialkov.Some of the betting in emerging markets works really well, others not so well. “

BBVA’s sale of its US retail banking activities for $ 11.6 billion in November 2020 bolstered its capitalization as its CET1 ratio rose to 14.37% in the second quarter from 12.15% at the end of 2020. The bank is taking advantage of its improved position to undertake a share buyback up to 10% of its outstanding capital, but it has been involved in mergers and acquisitions since it discharged its activities in the United States, notably when it entered negotiates the acquisition of Banco de Sabadell SA in the weeks following the sale.

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

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

As a fortuitous turnaround from reading it becomes increasingly unlikely, one of the bright spots for BBVA is that Garanti is self-funded, Ozsahin said. “Maybe the consolation… is that at least they don’t have to invest the extra money. It could be a black hole.”


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