The Rate Rise In Turkey Gives BBVA Breathing Space

Garanti provides BBVA 16% of its gross margin

Last week the Central Bank of Turkey raised its reference interest rate to 10.25% (compared to 8.25% previously), the first increase since September 2018. This surprising 200 basis points rise was in response to the worrying double-digit inflation levels in the Turkish economy, along with a currency at historic lows. The Turkish lira, which at the time was trading at a record low of 7,7207 to the US dollar, registered a brief 1% recovery against the euro and the dollar, but soon recovered its downward trend. However, the monetary authority’s move did give an unexpected boost to BBVA. Through its subsidiary Garanti, Turkey has become the Spanish bank’s third largest market by volume, providing 16% of its gross margin.

BBVA’s shares shot up 5.3% (2,284 euros) on the stock market last Thursday, the day of the Turkish central bank’s move. Almost a week later, the bank has maintained these price levels of around 2.36 euros per share. A few days earlier, BBVA shares had recorded their minimum annual level of 2.16 euros. So Turkey’s decision, according to analysts at Bankinter, “is a breath of fresh air for its profit and loss account and its long term share price.”

Turkey has been immersed in a currency crisis since 2018. The lira’s value has dropped sharply in the last month, already accumulating a depreciation of 4%. As a result, it has become one of BBVA’s big headaches. That said, the bank has a solid balance sheet in Turkey, with a liquidity cushion in foreign currency of 9.300 million dollars. Its CEO, Turk Onur Genç, recently pointed out that this liquidity will help “face the current crisis in a comfortable position, having reduced its foreign currency loan portfolio by 38% since 2015.”

BBVA has just increased its profit forecasts for this year and is considering distributing dividends again as soon as the ECB lifts its veto. It will be able to do so thanks to the improvement it foresees in the cost of risk. Mexico and the United States are two key markets for BBVA and on average are responsible for the improved forecasts. In Mexico, where the group generates 38% of its operating income, the cost of risk will be clearly below that in the first half of the year, according to the bank’s new estimates.