Turkey, a controversial bet of BBVA and at the discretion of Erdogan | markets

The market sanctioned BBVA on the stock market for its takeover bid for the 50.15% it does not hold in the Turkish bank Garanti, for an amount of 2,249 million euros. The Spanish entity has decided to allocate a large part of its excess capital to Turkey, a bet that strengthens the entity’s exposure to a particularly vulnerable emerging market, with a plummeting currency and a central bank in dubious independence that makes interest rate decisions almost at the dictation of Turkish President Tayyip Erdogan. On Thursday, he lowered rates again, despite inflation around 20%, which caused another sinking towards the lows for the lira, which is depreciating by more than 30% over the year. Such a rate cut completely tarnished the messages of the day of investors that BBVA held this Thursday and in which it announced an improvement in the dividend. The title is down more than 12% over the week.

What does BBVA see in Turkey? The president of BBVA, Carlos Torres, assured this Thursday that he already had rate cuts in his strategic plan. The entity affirms that, despite the short-term volatility, “the growth potential of the economy, its age pyramid, the country’s trade links with Europe and its low banking” make it an attractive market. The entity assures that the growth margin in the banking sector is very high: the GDP growth potential is 3.5% per year, with a population of 84 million inhabitants with an average age of 32 years. , according to data from BBVA Research. In this context, family debt represents only 17% of GDP, compared to 69% of the European Union average, which leaves enough room for development. During Investor Day of the bank, Recep Bastug, CEO of Garanti BBVA, pointed out that it also has greater coverage and a lower default rate than its competitors.

For specialists, however, this “short-term volatility” is not a minor element. Dennis Shen, director of Scope Ratings, assures that the depreciation of up to 30% of the lira since February shows the fragility of the currency in the face of external risks: “Since September, interest rates have been lowered by 300 points basis, which put Turkey’s benchmark real interest rate at minus 3.3%, one of the most negative central bank rates in the world. Shen adds that these rate cuts fuel inflation and increase the risk of a balance of payments crisis. The analyst warns it could also lead to a “sudden reversal” in monetary policy.

For his part, Guillaume Tresca, Senior Emerging Markets Strategist at Generali Investments, says the biggest risks of investing in Turkey are the country’s politics and external refinancing needs. “Elections will be held in 2023 and President Erdogan can push unorthodox new policies and growth at all costs that will be supported by a weaker exchange rate and tolerate higher inflation. The central bank’s credibility is weak and it is under strong political pressure to ease monetary policy, while inflation is high and large external refinancing needs would necessitate portfolio inflows,” Tresca told CincoDías. . The expert adds that currency risk and dollarization are issues affecting investments in Turkey.

Bank of America, however, believes that BBVA could end up acquiring less than 50.15% of the takeover bid, and stresses that the key to consolidating its project is not to hold all the remaining shares of Garanti, but enough to be able to maneuver the ship: “As long as BBVA manages to exceed 50.00% for a single share, the structure of the transaction will provide the bank with the flexibility to manage its investments in Turkey without having to commit capital in advance,” said the entity in a recent report, where he advises to buy. US analysts stress, however, that the problem of generating value in euros in a market where the currency continues to depreciate will remain a problem.

Messages from BBVA

Capital city. BBVA management assures that the entity will retain significant capital reserves after Garanti’s takeover bid and the €3,500 million share buyback plan, a statement that also includes the announcement of increasing the current payout to a range of 40%-50%, from the previous 30%-40%. She would even have a cushion for “more mergers and acquisitions”, alluding to the failed deal with Sabadell in 2020. The key is in the more than 8 billion euros in capital gains obtained from the sale of its business in the United States.
Profitability. The group expects to achieve a return on equity excluding intangibles (ROTE) of 14% in 2024, compared to 11.7% in the first nine months of this year. Regarding the efficiency ratio (which measures the proportion of costs to revenues), BBVA estimates that it will improve to 42% in 2024, compared to 44.7% at the end of September.
Evaluation. The stock market sanction received this week has nevertheless generated some positive recommendations for the stock. On Friday, JB Capital Markets raised its rating on BBVA from neutral to underweight.

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