BBVA Rides Currency Risk in Mexico, Turkey With Income Boost

(Bloomberg) -- Spain’s Banco Bilbao Vizcaya Argentaria SA navigated foreign-exchange risks stemming from victories of populist election candidates in key markets while continuing to benefit from the upswing of the Spanish economy. The shares gained.

Lower costs in Mexico offset an increase in non-performing loans in Turkey, with the two markets accounting for about half the bank’s profit. The Bilbao-based bank also benefited from rising demand for credit card and consumer lending in Spain and lower provisions. Overall, net income jumped to 1.3 billion euros ($1.5 billion) in the three months through June, slightly higher than analysts had expected.

“A decent set of numbers this quarter from BBVA,” Daragh Quinn, an analyst at Keefe, Bruyette & Woods, said in a note to investors. “Despite the elections in Mexico, activity levels have improved in corporate loans this quarter.”

Mexico’s Andres Manuel Lopez Obrador and Turkey’s Recep Tayyip Erdogan both won presidential elections on populist platforms earlier this year, with Erdogan vowing to take greater control over the economy and Lopez Obrador promising to extend social security and make changes to energy policy. That pressured the currencies of both countries.

The two markets’ fortunes have diverged sharply recently. The peso rebounded in the final weeks to end last quarter down less than 4 percent against the euro, having a relatively muted impact on BBVA’s earnings. The Turkish lira, however, dropped almost 10 percent as Erdogan pressured the central bank not to raise rates during his campaign, and awarded himself greater powers over the interest rate setting process after his June victory.

‘Uncertainties’

“We’ve had excellent results in the second quarter in spite of the uncertainties in some of the markets in which we operate,” Chief Executive Officer Carlos Torres said in a statement.

BBVA rose as much as 3.4 percent in Madrid, the biggest gain in three weeks. The shares were up 1.8 percent to 6.24 euros as of 13:55 p.m., paring this year’s losses to about 12 percent.

The results show that underlying profit in BBVA’s two main foreign assets is robust. Loans grew 9 percent and net interest income 8 percent in Mexico. Loan growth was even more dynamic in Turkey, where BBVA owns a 49.9 percent stake in Turkiye Garanti Bankasi AS, rising 15 percent in the first half from a year earlier while deposits grew 20 percent.

Big Short

Still, impairments increased in Turkey by 40 percent from a year earlier, while its non-performing loan ratio rose to 4.5 percent from 2.5 percent a year ago. Torres said he expect cost of risk to rise by 150 basis points in the second half of the year.

The risks posed by Turkey are one of the main concerns for BBVA. Steve Eisman, the senior portfolio manager at Neuberger Berman Eisman Group whose bets against the housing market before the 2008 crisis were chronicled in Michael Lewis’s 2010 book “The Big Short,” said in an interview on Bloomberg TV that he’s shorting BBVA because of its exposure to Turkey.

A pickup in the Spanish economy has cut the need for banks to make provisions against loan losses, and reviving confidence has led to higher volumes in consumer loans and mortgages. Here are some other highlights from the earnings statement:

  • 2Q net income 1.3 billion euros, estimate 1.22 billion euros
  • 2Q net interest income 4.36 billion euros, estimate 4.27 billion euros
  • 2Q CET1 fully-loaded 10.8 percent
  • 2Q bad loans ratio 4.4 percent
  • 1H net income 2.65 billion euros vs. 2.3 billion euros y/y

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