The biggest loser: BBVA, Spain’s second biggest bank.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Few foreign banks are as exposed to the risks currently affecting Turkey than Spain’s second biggest lender, BBVA. The bank owns about half of Turkey’s third biggest lender, which provides roughly 15% of its global revenues. But those revenues are under threat as the value of the currency they’re denominated in, the Turkish Lira, continues to fall.
In 2016, when Turkey’s president Recep Tayyip Erdogan declared a state of emergency after a failed coup d’état, Deutsche Bank analysts alerted that BBVA is the most vulnerable among all European banks to risks linked to political turmoil in Turkey. But rather than heeding the warning, BBVA doubled down on its bet by increasing its stake in Garanti.
On Monday, Garanti shares tumbled 4.8% to 8.11 Lira. Today it ticked up a smidgen to 8.15 lira. The main spark for the sell off was Erdogan’s victory in Sunday’s elections, which made him executive president of Turkey, meaning he is now both head of state and head of government. As such, his overbearing influence over the economy is, if anything, likely to grow, and that is unwelcome news for many investors.
Year-to-date, Garanti shares are down 26%.The stock is denominated in lira, and the lira has has plunged 19% year-to-date against dollar and 17% against the euro. The currency devaluation plus the slide in the bank’s share price combined make for a 39% loss year-to-date for a euro-based investor, such as BBVA.
Lenders have paid a heavy price across the board. The Turkish banks index has declined almost 25% year-to-date. Combined with the currency devaluation, foreign investors are looking at a near 40% loss as well so far this year.
For BBVA, whose stock is the third worst performing this year on Spain’s benchmark index, the IBEX 35, it’s not just the diminishing value of Garanti’s stock that poses a problem; it’s the declining value of the currency in which the stock — and most of Garanti’s business — is denominated. According to Morgan Stanley, with the headwinds facing the economy still unchanged, the currency could soon be hitting fresh record lows,
That is bad news for BBVA. In 2010 it shelled out €4.2 billion to acquire 25% of Garanti’s stock from General Electric and other investors. At the time Garanti was booming. In 2015 BBVA increased its holdings, paying €1.85 billion for an additional 14.9% of the shares, giving it control of the board.
At that point the risks of investing in emerging markets were beginning to mount, particularly in Brazil and Turkey. By 2017, with the Lira nose-diving, inflation soaring to 12.9%, war in Syria reaching crunch point, and Erdogan heaping pressure on state-owned banks not to raise interest rates, they were impossible to ignore. Yet BBVA still bought a further 9.95% of Garanti’s stock. It cost €859 million.
All told, BBVA has spent €6.9 billion in the last eight years to get its hands on 49.85% of Garanti. Since these purchases, starting in 2010, the Lira has collapsed all along the way. Garanti’s current market cap, converted into euros, is €6.3 billion. BBVA’s 49.85% stake in it is worth €3.16 billion. In other words, BBVA has lost 54% of its investment!
In addition, there’s the growing pressure on banks like Garanti to reorganize foreign-currency denominated loans as large companies struggle to repay their corporate loans. It bears the hallmarks of the early stages of a debt crisis. From Bloomberg:
The rise in restructurings threatens to spur an increase in unpaid loans as a plunge in the nation’s currency causes the cost of corporate Turkey’s foreign-currency debt — equal to about 40 percent of economic output — to surge. An interest-rate increase to try and stem the lira’s decline is also pushing up borrowing costs as the country’s biggest businesses seek to rearrange almost $20 billion of loans.
At the same time the U.S. Federal Reserve continues to unwind its QE experiment and raise interest rates, heaping further pressure on emerging market currencies. As the local currency weakens against the dollar, it gets harder and harder for local companies to service foreign currency bonds. That’s how a currency crisis becomes a debt crisis.
When it comes to amassing foreign-denominated debt, Turkey’s corporate sector is in a class of its own. Its overall stock of private sector debt has grown from 33% of GDP in 2007 to 70% today. It also leads all other major emerging markets on total foreign-currency-denominated debt (including public debt), which hit 69.5% of GDP last year (up from 39.2% in 2009), comfortably ahead of second-placed Poland (53.5%) and Argentina (51%).
Turkey faces a vicious circle in which investors continue to ditch the lira, making it even harder for corporations to repay their large stacks of dollar-denominated debt, further worrying investors about the nation’s economy and giving them another reason to dump the currency. Rinse. Repeat.
As for BBVA, its emerging market roller coaster ride could get even bumpier. Its biggest global market, accounting for over 40% of the group’s global profits, is Mexico, a country that has its own share of problems, including an incipient trade war with its biggest trading partner, the U.S., a slowdown in business credit, an election on Sunday that has many of the country’s business elite on tenterhooks, and, last but not least, a weak currency. By Don Quijones.
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