Doubling down on Emerging Market bets.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Once upon a time, Spain’s second biggest bank, Banco Bilbao Vizcaya Argentaria (BBVA), was a distinguished member of the global club of systemically important financial institutions (SIFI). It was, officially speaking, too big to fail. That all changed in November last year, when it was decided that BBVA had “declining systemic importance.” It lost its SIFI status and was relegated to mere mortal status, now presumably allowed to fail.
BBVA makes most of its money outside Spain. Its two main overseas profit centers are Mexico, where the bank owns a majority stake in the second biggest bank, Bancomer, and Turkey, where it recently consolidated its control of Garanti, the country’s third biggest bank. The acquisition of 40% of the bank’s shares gave BBVA control of the board and a huge presence in what was a very important — and lucrative — emerging market.
In the good times, BBVA’s investment in Turkey paid off handsomely. Even in the tumultuous first quarter of 2016, BBVA received 21% of its operating income and 13% of its net profits from Garanti’s operations. The country also accounts for roughly 5% of the group’s loans.
But now, the times appear to have changed. Friday’s failed but bloody coup d’etat has ramped up tensions in an already deeply divided nation. Deutsche Bank analysts revealed in a note on Monday that BBVA is the most vulnerable among all European banks to risks linked to political turmoil in Turkey. The next four most-at-risk banks: Italy’s embattled TBTF entity Unicredit, French behemoth BNP Paribas, Dutch giant ING, and the UK’s ultimate refuge of scoundrels, HSBC.
But it was BBVA that was hit the most in Monday’s trading, as its stock shed almost 3%. On Turkey’s stock exchange Garanti ended the day 7% down.
Doubling Down on EM Bets
Like Spain’s biggest bank, Santander, BBVA has spent the last five years doubling down on its emerging economy bets, even as two of their biggest markets, Brazil and Turkey, have heated up politically and slowed economically. In Turkey the coup has not only hit the national currency, the Lira, which plunged 5% on Friday before rebounding some on Monday; it has also raised serious questions about the country’s political and macroeconomic stability, as Professor of International Political Economy Dani Rodrik warns:
The coup attempt will add potency to Erdoğan’s venom and fuel a wider witch-hunt against the Gülen movement. Thousands will be sacked from their positions in the military and elsewhere, detained, and prosecuted with little regard for the rule of law or the presumption of innocence. There are already alarming calls to bring back the death penalty for putschists, which recent experience shows is a very broad category for Erdoğan. Some of the mob violence against captured soldiers portends a Jacobinism that would jeopardize all remaining due-process protections in Turkey.
The coup attempt is bad news for the economy as well. Erdoğan’s recent, somewhat skin-deep reconciliation with Russia and Israel was likely motivated by a desire to restore flows of foreign capital and tourists. Such hopes are now unlikely to be realized. The failed coup reveals that the country’s political divisions run deeper than even the most pessimistic observers believed. This hardly makes for an attractive environment for investors or visitors.
The immediate result is likely to be worsening capital flight as hot money gets cold feet, piling further pressure on Turkish assets. This is a big problem in a country that has recently seen one of the largest increases in non-financial corporate indebtedness, especially of the foreign-denominated kind. It was also home to one of the worst-performing currencies last year.
For BBVA the timing could not have been worse. Just last month the bank’s long-serving CEO, Francisco González, stunned Spain’s financial and business press when he warned in a public speech that the ECB’s Negative Interest Rate Policy (NIRP) could end up “killing” the banks — i.e., banks like BBVA [read… NIRP is “Killing Us,” Wheezes Spain’s Second Biggest Bank].
For European banks like BBVA, the main problem with NIRP is the shrinking effect it has on its operating margins, which in turn puts unbearable pressure on their balance sheets. For example, when the Euribor is at zero, interest rates on variable rate mortgages are at next to zero. And these variable-rate Euribor-linked mortgages predominate in Spain’s mortgage market.
To make matters worse, BBVA has an unwieldy €16 billion exposure to the beleaguered global energy industry, making it the 8th most exposed bank to the sector in Europe after BNP, ING, HSBC, Credit Agricole, Barclays, Société Générale and Deutsche Bank. Unlike BBVA, however, these banks are all still card-carrying members of the all-exclusive global club of systemically important financial institutions. They’ll get bailed out one way or the other. For BBVA, now just a mortal bank, such privileges no longer apply. By Don Quijones, Raging Bull-Shit.
In terms of how broke they are, Spanish banks are already in a category of their own. Read… Spain’s Banks are Suddenly “Too Broke To Fine”