Organic profitability and solid credit risk profile: Overweight in BBVA despite the rapid shift away from its historically conservative financial management

BBVABBVA 9months net profit up 46% yr-on-yr

Santander Corporate & Investment | Fitch announced this week that it has affirmed its ratings for BBVA (A3e, Ae, BBB+e). This includes its long-term issuer default rating of BBB+.

According to Fitch’s note, the confirmation of the ratings reflects the capacity for resistance of BBVA’s profits through the economic cycles. This is thanks to its geographic diversification, strong retails franchises in its key markets (Spain, Mexico, Turkey and various Latin American countries) and its ongoing good cost efficiency. Fitch highlights that its ratings also take into account BBVA’s adequate solvency and stable profile in terms of financing and liquidity, as well as its exposure to more volatile economies.

Analysts opinion:

The reasoning behind Fitch’s decision is line with the factors which we have taken into account in our Overweight recommendation for BBVA. The bank’s results in the last few quarters have continued to support our vision of its organic profitability, underpinned by a solid credit risk profile and a focused strategy. These elements, together with the fact that BBVA is prioritising efficiency, support our Overweight stance. That said, we perceive increasing pressure on our recommendation due to what we consider is a rapid shift away from its historically conservative financial management; a rapid decline in its solvency indicator (core capital) is noticeable, to levels which are increasingly more adjusted in comparison with other big European banks. And this raises the risks with some of its activities in greater risk markets (not just Mexico, but also Turkey, where its exposure is growing).

Fitch also flagged that its decisions on the lender’s ratings “take into account the recent completion of the voluntary bid launched last November, via which BBVA increased its stake in Turkiye Garanti Bankasi A.s. (Garanti, B/Negative)”. The ratings agency highlights that the “additional stake in Garanti fits in with the group’s strategy of deploying excess capital in markets which it knows very well.” The agency has also mentioned that this “does not alter our evaluation of BBVA’s business and risk profiles, given that it already incorporated the bank’s exposure to volatile emerging markets”. Whatsmore, Fitch’s note flags that “the increased macroeconomic risks in Turkey could put pressure on BBVA’s credit profile. And the likely adoption of hyperinflationary accounting will add volatility to the profits published at group level”. However, the ratings agency also points out that it believes “Garanti’s underlying credit fundamentals are still better than those of Turkey’s national banking sector”.

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