BBVA’s board of directors has agreed to launch a voluntary takeover bid for the 50.15% stake it does not hold in Garanti BBVA at a price of 12.20 Turkish liras per share, a once the necessary regulatory authorizations have been received. The maximum total amount that BBVA will pay to control Turkey’s largest bank is 25,697 million lira (equivalent to approximately €2,249 million), in cash, in the event that all Garanti BBVA shareholders sell their shares. The course of the bank recorded a fall of 4.28% on Monday after knowing the operation, while those of the Guaranteed rose by 9.92%.
The maximum expected impact on the group’s CET 1 capital ratio, the highest quality, from September 2021 “would be very limited, with a consumption of 0.46 points”, indicates the entity, which would maintain levels higher than his numbers marked as target. Due to accounting rules, the takeover has a cost of 1,400 million for the bank.
The good reception in Turkey is not surprising because the payment offered by BBVA represents a premium of 34% compared to the average price of the last six months; 24% in the last month; and 15% on the last price, November 12, according to the bank.
“This operation is a wonderful opportunity to invest in our subsidiary in Turkey and to generate value for our shareholders”, declared the president of the group, Carlos Torres Vila. “Furthermore, the price is very attractive for the minority shareholders of Garanti BBVA,” he added. In a subsequent conference to analysts, the chief executive defended that it was a good option to use the excess capital the bank has because it is growing in one of its key markets.
The deal comes after BBVA successfully sold its US business for 9.7 billion euros in November 2020 and Banco Sabadell’s subsequent takeover attempt failed for refusing to pay some 2, 5 billion euros in shares. Subsequently, the bank announced a buyback of securities worth 3,500 million, with which it hopes to amortize up to 10% of the capital so that the share price goes up.
He knows all sides of the coin in depth.
The takeover bid means increasing the economic risk in an emerging and unstable country from a geopolitical point of view (with President Erdogan at the lowest level of social support) and monetary: the lira has lost 68% of its value against to the euro over the past five years and with successive changes in the leadership of the Central Bank of Turkey. But BBVA’s bet indicates that the entity’s leaders, both Torres and Turkish CEO Onur Genç, are convinced that this is a medium-term opportunity. “The sale of the subsidiary in the United States gives us a strategic option to, among other things, invest the excess capital generated in our main markets,” Genç underlined.
Realizing that the deal was not going to be well received by investors, at least initially, Torres told analysts, “If you look at the near immediate impact, we’re talking about a 13% increase in earnings per share, 7%, which results in an increase in the dividend of the same percentage if the same distribution is maintained”.
Some observers understand the market’s hesitation. “Exchanging the United States for Turkey is a very risky operation even with a Turkish CEO,” said Fernando Zunzunegui, a lawyer specializing in financial regulation, on his Twitter. Barclays analysts believe some investors may require BBVA to have a higher capital adequacy ratio from its investment in Garanti, viewing it as a riskier operation due to its position in an emerging country.
Nuria Álvarez, banking analyst at Renta 4, believes in the merits of the operation “in the medium term because Turkey is a country that will continue to grow and contribute more to BBVA’s profits”. However, Álvarez warns that in the short term, the price could continue to suffer “because the bank takes on a higher risk and will be more dependent on emerging countries”. And he adds: “According to our calculations, 68% of the profit, if the offer is successful, will come from Mexico and Turkey.” Additionally, BBVA has another division that includes Latin American countries.
Another banking expert, Íñigo Vega, from Nau-Securities, also considers that the takeover bid adds more risk to BBVA, but believes that it makes sense because the bank “has already assumed that it should come to the rescue of the bank if any problems arise because he is the major shareholder and consolidates the Guaranteed in his accounts, but he only received half of the profits, now you can take 100% of the profit with which you offset the real risk that you assume in Turkey”. Vega points out that BBVA now values Garanti at a third of the price of its first acquisition in 2015, “while it was buying very expensive. With this less costly operation, it achieves a more balanced average valuation of his participation.
Up to 11,200 million in Guaranteed, the biggest investment
According to calculations by Renta 4, BBVA had already invested 6,908 million in Turkey’s largest bank through three share purchases. In addition, it had to make a value adjustment, due to the sharp depreciation of the lira, of 1,840 million. Subsequently, the entity made another value adjustment for 1,500 million, but charged it to the subsidiary BBVA SA for which, according to banking sources, “this had no effect on the consolidated accounts of the group “. Without taking this last figure into account, the entity invested 8,748 million, to which should be added the maximum investment of 2,450 million in the event of the success of this takeover bid. In total, by early 2022, when the operation could be completed, the second Spanish bank could invest 11.2 billion euros, its largest operation.
BBVA says that since arriving in Turkey in 2011, it has made profits of 5,200 million. Remember that in Mexico, where it makes 52% of the profits, it invested 7,300 million dollars between 2000 and 2004. At the current exchange rate, it would be 6,375 million euros and the profitability offered is much higher: this alone year it should bring in 3,250 million euros.
The operation comes at the right time with increased profits for BBVA (3,311 million euros between January and September 2021, compared to losses of 15 million euros in the same period of the previous year) after having reduced the provisions made by the pandemic and reduced costs due to layoffs and office closures. However, the intermediation margin remains low and the default that could occur in 2022 when the principal of the ICO loans must be paid is unknown.
Improved earnings per share
Assuming full acceptance of the offer by Garanti BBVA shareholders, and taking into account the profit estimated by analysts for the group and the subsidiary, the transaction would increase BBVA’s earnings per share in 2022 by 13 .7% and the tangible book value per share in September 2021 of 2.3%. The maximum expected impact on the group’s CET capital ratio from September 2021 would be very limited (-46 basis points).
The offer is not conditional and BBVA will accept any level of participation, which will be considered satisfactory. In the event that not all shareholders are present, but after this operation BBVA exceeds 50% participation, the bank could increase its participation with purchases on the market without having to launch a new public tender offer.
Pablo Hernández de Cos, Governor of the Bank of Spain, participated this Monday in the Annual Convention of the Association of Financial Markets (AMF), held in Madrid. Asked by the media about the risks of a presence in banks in emerging countries, he declared, “generally speaking, that the effect of geographic diversification has been analyzed in the Financial Stability Report” and that was seen as positive, but it must be done with care, properly assessing the jurisdiction and the market in which it is invested”. In the aforementioned report, it was warned that rates in Turkey had reached 19.6% in September. In a context of large external financing needs and very low international reserves, the most important risk facing the Turkish economy is that of a loss of confidence in the financial markets”.
With a market share with private banks of 20% in Turkish lira loans and 19% in deposits, Garanti BBVA, which has been part of the group for 11 years, is the country’s largest private entity and the largest by market capitalization. . As of September 2021, it had 21,651 employees, 5,535 ATMs and 1,007 branches. It presents the best metrics in the sector in terms of profitability (with an ROE of 19.3%, against an average of 15.6% among its competitors) and credit quality (with a default rate of 4.0%, against 5.2% on average). in the sector, and a coverage rate of 77%, against 69%). In addition, it stands out above the BBVA group average in digitization, both in digital sales in units (83% of the total) and in digital customers (78% mobile penetration).
BBVA considers Turkey as a key market, despite its high volatility and risks, due to the growth potential of its economy, its low banking and its age pyramid. BBVA CEO Onur Genç comes from the Turkish bank. BBVA made its first investment in Garanti in 2011, buying 25.01% of the entity, through the acquisition of shares in Dogus and General Electric. In 2015, BBVA became the largest shareholder, increasing its stake to 39.90% through the purchase of an additional package from Dogus. In 2017, the Spanish bank increased its stake to the 49.85% it currently holds.