After the euro debt crisis, Spain’s alpha-lender sought greener pastures in the Emerging Markets. That bet is coming home to roost.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Few, if any, global banks have bet as large, or as recklessly, on fast-growth emerging markets as Spanish lender BBVA. In the first half of 2018 its subsidiaries in Turkey, Mexico, Argentina, and other Latin American economies provided roughly half of its revenues and over 60% of its global operating profits. Now, with the current emerging market downturn deepening and contagion spreading from one market to another, BBVA is beginning to pay the price for its elevated exposure.
The bank’s shares, at €5.20 a share, have plunged 18% since the beginning of August, when the latest phase of Turkey’s crisis began, and are down 26% year-to-date. The bank’s debt is also getting more costly to service. The main reason is BBVA’s exposure to roughly €76 billion of Turkish assets, through its ownership of around half of Turkey’s third largest lender, Turkiye Garanti Bankasi AS. Many of those assets are loans to Turkish companies denominated in foreign currencies, making them much more difficult to service as the Turkish lira crumbles.
Last week, a BBVA spokesperson reported that senior executives at the bank now saw the cost of ensuring BBVA’s loan book in Turkey against risks rising to 200 basis points in 2018. That’s 50 basis points higher than the last estimate, in July. The bank has also revised down its economic growth forecast for Turkey and has acknowledged that the potential impairment risks in Turkey’s energy and real estate sectors, to which BBVA is highly exposed, are higher than originally estimated.
In terms of its operations in Mexico, where it employs 37,000 employees, or 28% of its global workforce, BBVA announced that it would cut 1,500 jobs. BBVA’s Mexican subsidiary, Bancomer, provides over a quarter of the group’s gross global revenues and around 45% of its operating profits.
The bank’s official reason for the redundancies is that it forms part of its root-and-branch (if you’ll excuse the pun) digital transformation, which has led to a declining need for human workers.
BBVA has bet heavily in recent years on digital technologies. In 2015 the bank’s chairman, Francisco González, said he intends to transform BBVA from a bank into a software company. To that end, the bank has invested over $1 billion in acquiring a string of fintech companies, including Finnish start-up Holvi, online UK bank Atom, North American start-up AZLO, and part of Berlin banking platform solarisBank.
A few months ago, BBVA said it was on the verge of enlisting Artificial Intelligence “agent” Amelia to take over many of its customer support functions. The technology had already been trialed at BBVA’s call center in Mexico to address customer complaints and inquiries. The bank’s long-term plan, however, is to broaden the application of AI to other markets and areas, as the bank seeks to automate sales, advisory and support services.
According to its makers, New York-based IPsoft, Amelia is capable of detecting and adapting to caller’s emotions, as well as making decisions in real time. It can even suggest improvements to the processes for which ‘she’ has been trained. Incidentally, most all the jobs that have been cut in Mexico are front-office customer service positions, so it is perfectly possible that Amelia is beginning to make ‘her’ presence felt in new areas of BBVA’s corporate structure.
Nonetheless, the timing of the Mexican layoffs is still suspicious, coinciding with arguably the biggest threat BBVA has faced since the euro debt crisis (2010-12), during which time its shares slumped from over €13 to €4.66, their lowest point this century. Like many European financials, those shares have failed to stage any kind of convincing, enduring recovery since then. Now, after a month-and-a-half of Turkish turmoil, they are once again sinking fast, and are just 53 cents away from setting a brand new low.
The Bank of Turkey’s monetary policy committee is scheduled to meet this Thursday. Senior managers at BBVA have repeatedly called on the Bank of Turkey to hike rates to halt the Lira’s depreciation. “Something has to be done about interest rates,” Ali Fuat Erbil, chief executive officer of Garanti said. “Besides fiscal discipline, monetary tightening is the remedy. Is there need for that? Yes there is.”
The central bank has already pledged to raise interest rates in order to combat inflation, which soared to 17.9% year-on-year in August, and halt, or at least slow, the Lira’s downward spiral. But will it be enough? Will Turkey’s ruler, Recep Tayyip Erdoğan, a self-described “enemy of interest rates,” allow the central bank to raise the benchmark rate high enough to have a chance of stabilizing the currency, in the knowledge that such a measure will almost certainly put an end to the extended era of debt-fueled economic growth Turkey has experienced under Erdogan’s rule?
But Turkey’s not the only emerging market headache affecting BBVA. There’s also Argentina, whose currency continues to collapse despite the IMF pledging to bailout the country’s dollar-debt to the tune of $50 billion. BBVA has roughly 5% of its operating revenues at stake in the country. According to one source, the situation there is now so worrisome that the ECB has demanded to be kept abreast of the risk exposure Spain’s two alpha banks, Santander and BBVA, have to Argentina.
Spain’s market regulator, the CNMV, also wants to know the extent of the losses racked up so far in Argentina. According to BBVA, the problems are very much under control: iIs investments are well-hedged and its Turkish and Argentinean operations are siloed from the rest of the company. Plus, its other markets, in particular Mexico, are doing just fine, and there is, as always with a big heavily exposed bank, nothing to worry about. By Don Quijones.
Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.
Since 2009, reckless has been the new normal for banks backstopped by central bankers’ deranged money printing and middle class taxpayers. The tricks used by policymakers and central bankers to defer the financial reckoning day and true price discovery seem limitless, so who knows how much longer the can-kicking can continue?
I agree on the can-kicking.
But is the banks’ recklessness new? I was reading the report on the financial crisis today. Breathtaking stuff. Makes me wonder (again) why hardly anyone was charged.
Since you had the stomach to wade thru the document (book) noted in your post I would also recommend: “Wall Street and the Financial Crisis” Anatomy of a Financial Collapse. The US Senate Permanent Subcommittee on Investigations. (Cosimo Reports 2011) This is the Senate Staff Report.
It is also “…..breathtaking stuff!” It really exposes the arrogance and crudity of our financial system and should be required reading for anyone exiting their homes each day to work in the system.
The book: http://cosimobooks.com/book_description.php?book=3672&texto=Wall-Street-and-the-Financial-Crisis-Anatomy-of-a-Financial-Collapse-Economic-Reports-1616405457-9781616405458&uri=&s=69
PDF access: https://www.hsgac.senate.gov/imo/media/doc/REPORT%20-%20Anatomy%20of%20a%20Financial%20Collapse%20(links%20to%20GPO).pdf
Turkey raise rates?
They are already near 18%, and I noticed Garanti interest on mortgages is set at 30%. I think further rate changes are likely beyond making much difference once at this level.
The higher the interest rates go, the lower the value of real assets. The vultures are circling.
If you’ll excuse my using the ft as a source
In the larger picture there are some funny dealings going on with Turkey also, it is hard to make out where exactly EU and US are with regard, if the plan was not Erdogan etc., exactly what it all adds up to is very hard to figure. Simple rule is that too much foreign denominated debt leaves any country vulnerable…unless it is happy taking itself off the global financial (and hence structural) stage if need be.
I suspect Turkey earned favored treatment in the Cold War more for it’s geographic location than any other single factor.
This is a shame, because Turkey had an 80+ year history of slowly moving toward a secular society; at one point even envisioning EU membership. Then Erdogan decided to drag them back to the nineteenth century.
Yep, but something screwy happened the last ten years also, and I am not sure if Erdogan is reacting to that or is part of that happening. The EU has been putting off membership time and again, maybe for own good reason but it seems like messing Turkey around also. Next door you have Syria that went from darling to pariah almost overnight, and with more than a little western help. The “false coup”, Gullen in the US, ally Egypt turning more to Russia maybe now, distancing from Saudi some…. this is all big boys and geopolitics, and the region is a crazy mess because of it – I don’t even know where to start understanding it properly anymore.
Last I saw, Argentina hit 60%, but that was at least a week ago.
Maybe it is higher now??? LOLOLOLOLOLOLOLOL!!!!!!!!!!!!!!!!!!!!!!!!!!!!
I suppose that the time scale could be changed from per annum to per month, per day even… wouldn’t frighten people so much and it would save ink from less zeros. Not only ecological , it would be a prudent move in preparation for ink scarcity, and could also be touted as a labour saving initiative.
In fact it could be interpreted as a full retaliatory measure if presented with a correct slogan, such as:
“We don’t need your paper, we still have our ink ! ”
That will make a few people think, eh?
The Wall Street Journal has quite a piece on the collapsing construction sector. It has a photo of a lady camped out in a tent where her condo was supposed to be two years ago.
When Erdogan took office Turkey had 50 malls. Now it has 400.
The CEO of Caldwell Banker of Turkey says builders unable to finish projects are starting new ones just to get the deposits. He describes it as a ‘Ponzi scheme’
Turkish developers borrowed billions to go on a speculative building binge. Now they’re screwed.
From a distance, Esenyurt, a newly built up neighbourhood on the edges of Istanbul, looks a bit like Hong Kong or Dubai, with a bustling downtown of shiny skyscrapers. Upon closer examination, however, you notice that tower after tower stands incomplete, lacking windows or furnishings; others are only half-occupied, their windows dark after nightfall.
“In the residential areas, 100% of the construction has stopped,” says Mohamed Karman, a local estate agent, from his small office in the central square of Esenyurt. “Do you know why? The materials. Everything is in dollars, you pay in dollars.”
The crash of the Turkish lira last week after two years of steady decline spooked global markets – but anyone looking at Istanbul’s skyline would have been far from surprised. Everywhere you look in the city, evidence of a debt-fuelled construction boom abounds: new skyscrapers frame the horizon, huge shopping malls dot the streets and among several megaprojects is a new airport, set to be the world’s largest.
In the middle east every country wants its own Dubai. Silk city in Kuwait, the new Saudi initiative….we even had B. Johnson selling investors as ready to build “the next Dubai” in Libya ” once the bodies were cleared out of the way”.
Dead bodies and incoming mortar and small arms fire tend not to inspire investor confidence.
Nothing to worry about. Just leave your money in the bank and wait for the things coming…….
“…digitize” (automate) sales, advisory and support services.’
USA USD hegemony is causally responsible for all EM contagion that will eventually manifest into global contagion for the USA marquee investment banks that at one point in time promised the entire world that their financial alchemy had solved market contagion and stock market crashes as a general rule of their combined exceptionalism as developed nation central planning astuteness & all round business acumen.
Yanis Varoufakis summed their collective hubris up like this… https://www.zerohedge.com/news/2018-09-10/10-years-later-lehman-still-shaping-our-post-modern-1930s-moment
“The bank’s shares, at €5.20 a share, have plunged 18% since the beginning of August, when the latest phase of Turkey’s crisis began, and are down 26% year-to-date.”
You could buy ING GROEP at 15 € a year ago.Now is at 11€
The same 26% DOWN than BBVA.
But the problems are in spanish banks.
Am I right Don Quijones?
No, I’m afraid you’re not. At no point have I said that Spanish banks are the ONLY banks with high levels of exposure to high-risk emerging markets. In fact, I have even written about the risks the crisis in Turkey poses to Unicredit, BNP Paribas and ING (https://wolfstreet.com/2018/08/10/bbva-bnp-unicredit-european-banks-plunge-ecb-contagion-turkey-lira/).
But, pound for pound, Spanish banks do have the most exposure to the two most at-risk emerging economies, Argentina and Turkey. As an article by Reuters recently showed (https://www.reuters.com/article/us-turkey-currency-eurozone-banks/factbox-european-banks-exposure-to-turkey-idUSKBN1KY1WT), the hit to BBVA’s equity of a “worst case scenario” in Turkey would be almost three times greater than any respective hit to ING’s, while another group of analysts I cited in the above article said it would be around half as much.
Spanish lenders are also far more exposed to Latin America than any other lenders, so if the contagion spreads to the two core economies there, Brazil and Mexico, the effects on Spain’s banking system could be huge.
Deutsche Bank and Unibail-Rodamco have plummeted 20-26% in a year too.
If the expected 2018 Turkish inflation rate is 101%, a 17% central bank rate is bupkis.
Argentina got 60% rates until December, they government says.
And they have bern recently wasting 250 to 500 millons dollars a week to keep the dollar to not go beyond the 40 pesos barrier.
Does anyone have an theory how this might affect BBVA/ Compass here in the United States.