BBVA Will Continue To Suffer Because Of Deterioration In Turkey

BBVA's geographical exposure explains the stock's market evolutionBBVA's geographical exposure explains the stock's market evolution

Turkish President Erdogan yesterday began to exercise his new “attributes”, recently provided by an ever more authoritarian political system, in relation to the monetary policy of the central bank by affirming informally that interest rates will be lowered. This weakened the Turkish Lira from 4.66/$ to 4.85/$ (although it layered recovered to 4.82/$). This had a negative impact on the share price of BBVA, which holds 49.85% in the Turkish bank Garantí. In terms of the balance, this represents approximately 10.8% of total assets, while in terms of results it contributes 16.1% of gross margin (16.3% in 2017), 18.6% of net margin (19.2% in 2017) and 12.3% of BNA (15.4% in 2017).

For Bankinters’ analysts, this is a “structural problem” for BBVA because, although the weight of Garanti is not decisive in the overall group, it does have a strong influence (between 11 and 15% in general terms, depending on the scale analyses). Above all BBVA’s exposure to the country will be considered by the market, in practice and in terms of share price, as an open risk getting worse over an unlimited period.

Macro diagnosis of Turkey is worrying: with a GDP (approximate figures) of $880 billion, its monthly current account deficit approaches $6 billion ($5.89 billion in May up from $5.45 billion in April), which could lift the deficit for 2018 (whole year) to 8% of GDP. This means that Turkey needs an injection of about $200 billion per year, around 23% of GDP.

Those figures could be unsustainable. They combine with inflation above 15%, which explains why the Turkish Lira has depreciated from 3.8/$ at the beginning of the year to 4.85/$ now. To try to break this depreciation, which among things imports more inflation, the Central Bank has been raising its key interest rate from 7.95% in May to 17.9% now. This has generated strong internal social tensions. Erdogan has named his son-in-law governor of the central bank, which means that, in practice, the central bank has lost its independence and that from now on it will be the President himself who decides the key interest rate.