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BBVA Forecasts South American Asset Deterioration Amid Economic Challenges and Interest Rate Pressure

Spanish banking group BBVA has expressed concerns over the anticipated deterioration of its assets in South America by the end of this year. The bank attributes this outlook to worsening economic conditions and the mounting pressure stemming from higher interest rates. Despite achieving a 13% rise in net profit during the third quarter, driven by increased lending income in Spain and Mexico, these positive figures are overshadowed by concerns about the South American market, coupled with a rise in provisions and losses in Turkey.

The reported net profit of 2.08 billion euros ($2.20 billion) was slightly better than the 2 billion euros expected by analysts. However, provisions surged by 29% year-on-year to 1.21 billion euros, slightly exceeding the 1.14 billion euros expected by analysts polled by Reuters. Consequently, BBVA shares dipped by 1% after having gained nearly 13% over the past six months.

In this uncertain environment, BBVA’s cost of risk, which measures credit risks and potential losses for the bank, increased by 7 basis points in the July-September quarter, reaching 111 basis points (bps). Due to higher provision needs in South America and Mexico, BBVA raised its cost of risk guidance for 2023 to “slightly” above the current 111 bps, up from the previous guidance of around 100 bps.

BBVA’s Chief Executive, Onur Genç, explained that macroeconomic deterioration in the core geographies where the bank operates, such as Peru and Colombia, has contributed to the pessimistic outlook. Furthermore, the bank revised its cost of risk guidance specifically for South America to around 250 bps for 2023, up from a previous guidance of 225 bps. This reflects the significant challenges the bank faces in the South American market, where its net profit fell by 37% in the third quarter.

Strong Performance in Mexico and Spain

Despite these challenges, BBVA continues to derive strength from its operations in Mexico and Spain. The bank has historically looked to Mexico as a source of stability when faced with difficulties in Europe, and this remains the case. Additionally, like other European financial institutions, BBVA is benefiting from higher interest rates on the continent.

At the group level, BBVA’s net interest income (NII), which represents earnings on loans minus deposit costs, surged by 22.5% year-on-year to 6.4 billion euros in the quarter, surpassing analysts’ expectations of 6.05 billion euros. This robust performance helped boost BBVA’s return on tangible equity ratio (ROTE), a measure of profitability, to 17% in September, up from 16.9% in June. The bank has forecast a high-teens ROTE for 2024.

In Mexico, BBVA reported a 21% rise in net profit, with NII increasing by 30% in the quarter, supported by heightened lending activity, even though funding costs had risen.

In Spain, the bank saw a remarkable jump of 75% in net profit, with NII up by 62%. This positive performance was attributed to wider margins in the home market, aided by an increase in customer spreads to 333 bps compared to 312 bps in the second quarter. This uptick in spreads, coupled with higher returns on loans, offset the smaller rise in deposit costs. Consequently, the bank raised its NII growth guidance in Spain to 50% for 2023, up from its previous guidance of between 40% and 45%.

Challenges in Turkey and Solvency

BBVA faced difficulties in Turkey, where the bank shifted to hyperinflation accounting in 2022. Consequently, the lender reported a loss of 158 million euros, with NII declining by 25.6%. Additionally, the bottom line in Turkey was impacted by a higher tax rate.

In terms of solvency, BBVA closed September with a core tier-1 fully loaded capital ratio, the strictest measure of solvency, of 12.73%, slightly down from 12.99% in June due to the impact of a 1 billion euros share buyback announced in July.

In conclusion, BBVA’s outlook for South America raises concerns as the bank anticipates further asset deterioration, largely attributed to economic challenges and pressure from higher interest rates. However, the bank continues to demonstrate strength in its operations in Mexico and Spain, with a robust rise in net profit and NII in both regions. Challenges persist in Turkey, where accounting adjustments have impacted the bottom line, resulting in a loss for the bank. BBVA remains focused on maintaining its solvency and profitability, despite the complex economic landscape and market-specific challenges it faces.

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