Organic profitability and solid credit risk profile: overweight BBVA despite the rapid abandonment of its historically conservative financial management
Santander Companies and investment | Fitch announced this week that it confirmed his grades for BBVA (A3e, Ae, BBB+e). This includes its long-term issuer default rating of BBB+.
According to Fitch’s rating, the confirmation of ratings reflects the resilience of BBVA’s profits through economic cycles. This is due to its geographic diversification, strong distribution franchises in its key markets (Spain, Mexico, Turkey and various Latin American countries) and its continued good profitability. Fitch emphasizes that its ratings also take into account adequate solvency and a stable profile in terms of funding and liquidity, as well as its exposure to more volatile economies.
The reasoning behind Fitch’s decision is consistent with the factors we considered in our Overweight recommendation for BBVA. The bank’s results in recent quarters have continued to support our vision of its organic profitabilitysupported by a strong credit risk profile and a targeted strategy. These elements, together with the fact that BBVA prioritizes efficiency, support our Overweight position. That said, we see growing pressure on our recommendation due to what we see as a rapid shift away from its historically conservative financial management; a rapid decline in its solvency indicator (equity) is perceptible, at increasingly adjusted levels compared to the other major European banks. And that increases the risks with some of its activities in higher risk markets (not just Mexico, but also Turkey, where its exposure is increasing).
Fitch also said its decisions on lender ratings “take into account the recent completion of the voluntary offer launched last November, by which BBVA increased its stake in Turkey Guaranteed Bankasi As (Guaranteed, B/Negative)”. The rating agency points out that “the additional stake in Garanti is part of the group’s strategy to deploy excess capital in markets it knows very well”. The agency also mentioned that this “does not change our assessment of BBVA’s business and risk profiles, given that it already incorporates the bank’s exposure to volatile emerging markets.” In addition, Fitch’s memo notes that “Increased macroeconomic risks in Turkey could put pressure on BBVA’s credit profile. And the likely adoption of hyperinflationary accounting will add volatility to reported earnings at group level”. However, the rating agency also stresses that it believes that “Garanti’s underlying credit fundamentals are still better than those of Turkey’s domestic banking sector”.