Bankinter | We are revising our recommendation for BBVA to Neutral from Buy because of the deterioration of the situation in Turkey.
The numbers of the BBVA Group at the close of the first half of 2018 are solid – pro forma CETI FL of 11.4% with attributable profits of 2.649 billion € (+14.9%; 29.5% in real terms) – but the deterioration of the macro situation in Turkey and in the news flow invite prudence. In this environment, the most likely is that the bank´s share price will continue to suffer in the short term, which is why we are changing our recommendation of the shares.
BBVA is in Turkey through Garanti where it controls 49.85% of the capital with a carrying value of 4.4 billion€ (8.0% of the net equity of the group).
In terms of the balance sheet, it represents approximately 10.8% of total assets, which in the profit and loss account amounts to 16.1% of gross income (16.3% in 2017), 18.6% of net income (19.2% in 2017) and 12.3% of attributable profits (15.4% in 2017).
The macro situation in Turkey in Turkey is delicate and the country confronts three major challenges:
- Turkey must correct significant macro imbalances. The current account deficit is above 7% of GDP, inflation is approaching 16% – well above the Central Bank target of 5% – and GDP growth shows clear signs of weakness.
- The lack of confidence in the independence of the Central Bank, due to the interference of President Erdogan, who wants to keep interest rates low, in economic policy and the management of the Central Bank – currently governed by the President´s son-in-law.
- The deterioration of relations with the US after the imposition of tariffs on the importation of Turkish aluminium and differences over the geopolitical situation in Syria.
In this environment, the depreciation of the Turkish Lira (accumulated falls this year of -75.5% against the dollar and 67.2% against the Euro, although recovering slightly on Tuesday) makes correcting the imbalances even harder while encourage capital outflow from a country highly dependent on foreign financing. In this environment, it is probable that the ratings agencies will downgrade the country´s credit rating – this Friday S&P will reveal its decision – and that the flow of negative of negative news.
BBVA (Neutral; Monday close: 5,45 euros; Objective Price: 8,25 euros).