Class of 2019: BBVA
With falling rates in Europe and the US, and Turkey still in trouble, only Latin America – especially Mexico – can keep up BBVA’s spirits.
More reliant than ever on Mexico
What would BBVA do without Mexico? Even in a year when the Mexican economy is grinding to a halt, even shrinking, BBVA’s business in Mexico has been able to offset bigger worries elsewhere in its network. That’s a testament to the country’s positive interest rates and the long-term profitability of its highly concentrated banking sector, of which BBVA controls the biggest share.
“We’ve been beating our budget and analyst consensus from day one – in the first, second and third quarters,” says chief financial officer Jaime Sáenz de Tejada, looking back on the first nine months of 2019.
“Our stakeholders expected a challenging year, especially in the emerging markets relevant to our footprint,” he notes, adding that BBVA’s banks in Mexico and Turkey performed better than expected.
Compared with Mexico, however, Turkey is a smaller contributor to BBVA’s profits and its banking sector is in worse shape. There is concern about the sustainability of Turkey’s economic recovery, while its currency is exceptionally volatile. The absence of a more developed non-performing loan market will prevent a more rapid reduction in NPLs in Turkey, in the sector and at BBVA, even in a relatively positive economic scenario.
By far the biggest problem for BBVA now is in the developed world, thanks to interest rates. (Spain remains the second-biggest contributor to BBVA’s profit after Mexico.) The bank will also suffer from unexpectedly lower dollar rates thanks to its Houston-based commercial bank, which it rebranded BBVA USA in 2019.
After the European Central Bank cut rates to -40 basis points in September, the formation of a ‘popular front’ governing coalition in Spain in November points to an even bleaker year for BBVA in its home country.
Far-left party Podemos has spoken of a financial transactions tax, while the centre left has also promised higher taxes on banks.
Meanwhile, BBVA and its former executive chairman, Francisco González, are now subject to a Spanish high court investigation into allegations of spying related to the bank’s hiring of a security company, Cenyt, linked to jailed former senior police officer Jose Manuel Villarejo, to investigate an attempted takeover of BBVA by a local construction company, Sacyr, according to Spanish media reports.
These unexpectedly worse developed-world problems make Mexico even more important for BBVA, especially in the absence of a bigger boost from Turkey.
|Carlos Torres Vila|
BBVA even thinks it can step up its growth in Mexico as it tries to make the best of the greater politicization of Mexico’s lower classes under president Andrés Manuel López Obrador. His rise to power in 2018 caused various scares at local banks; it has forced BBVA to think harder about using digital no-frills services to extend its customer base. Fortunately, this ties in with the way that new executive chairman, Carlos Torres Vila, sees BBVA’s role globally in the digital era.
“Our purpose is to bring this age of opportunity to everyone – and everyone means society and the challenges that society has because of the lack of sustainability in the environment, the lack of sustainability socially,” Torres Vila told Euromoney in 2019.
In the past, Mexico’s worries about banking cowboys meant restrictions on new licences and allowing the incumbents to keep prices high – at the cost of financial inclusion. Now the government is moving to clamp down on high fees and the regulator is hoping to encourage more fintech firms and neo-banks.
According to Sáenz de Tejada, bringing new customers into the sector could be biggest driver of BBVA’s profit in Mexico in the coming years.
“We have an opportunity and an objective to increase bancarization in Mexico,” he says. “A lower cost of service should allow us to have profitable relationships in a less wealthy section of society.”
Problems in Europe and the US make BBVA’s prospects elsewhere in Latin America more important too – especially Colombia and Peru. However, hopes for expansion in Argentina are once again forlorn. It also sold its bank in Paraguay in August.
Sáenz de Tejada says the Paraguay exit was opportunistic, as the buyer – local group Gilinski – was offering a price beyond the value it could create in the country on its own.
The sale should add about 5bp to the group’s common equity tier-1 ratio, which will be helpful in the event of more pressure on the bank to build up its capital under the ECB’s Targeted Review of Internal Models.