high inflation, volatile pound and unstable monetary policy

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The banks present in Turkeyand between them BBVAwhich recently announced its intention to increase its presence in the country, are facing these days nail Perfect storm which can undermine financial stabilityas analysts of Fitch. Soaring inflation (well above levels seen in the Eurozone), government-influenced monetary policy and a highly volatile currency are causing stress in the country’s financial sector. And not only that. Some analysts also predict the possibility of government intervention in the banking sector.

Last Monday the Turkish Statistical Institute announced that inflation was closing the month of December 36.08%the highest level recorded in the country since 2002 and well above the figure for the previous month, which was 13.58%.

A rise in inflation despite which the Bank of Turkey has made several interest rate cuts in recent months under the interference of the country’s Prime Minister, Recep Tayyip Erdoğan. Something which, in addition, triggered the volatility of the lira, whose value has suffered sharp declines several times in recent weeks and in particular on December 20, depreciating by more than 17% against the euro in a single day. .

Financial stability in danger

Nail Perfect storm that analysts are already warning that this could have serious consequences for the banking sector present in the country, as the rating agency Fitchwho said so very clearly in a report published at the end of December on the Turkish financial system.

He points out that the deterioration of the country’s confidence and the weakness of the lira, which occur when there is monetary policy instability of the Bank of Turkey and very high inflation, “create risks for macroeconomic and financial stability”.

Headquarters of Garanti BBVA.

Elena Lozano

“This is negative for the credit profiles of banks and could increase the likelihood of government intervention in the banking system“, affirmed the experts of Fitch. Indeed, the firm attributes to the majority of the banks of the country a note B+, with a negative outlook, a note located in the degree of speculationbecause of these threats.

From the rating agency, they point out that the capital ratios of Turkish banks have been “eroded” by the depreciation of the lira, “due to the inflation of risk-weighted assets”. In fact, they believe that each 10% depreciation of the pound removes about 50 basis points from CET1the market benchmark capital ratio.

A cheaper offer

A situation that puts all the banks in the country on alert, including BBVA and even more since it announced a takeover bid on the 50.15% that it does not yet control of Garanti, its subsidiary in Turkey. An operation that nevertheless benefits from the volatility of the Turkish lira because its collapse lowers the cost that it will ultimately have for the bank, as this newspaper has already reported.

The chair entity Charles Torres announced that the transaction would be completed through an exchange of 12.20 Turkish lira per sharewhich implied a premium to the close of the last previous trading session, which was 10.58 lira Turks per share. This price assumes that the The maximum amount that BBVA will pay for the shares of minority interests in Garanti will be 25,697 million Turkish liras, which at the time was equivalent to approximately 2,249 million euros. Now, however, this amount is exchanged for 1,680.2 million euros, i.e. a cost 25.3% lower than that initially calculated.

In total, the final cost of the operation for the bank will be established when the entity receives the relevant authorizations to start it, in the first place, and when it knows how many minority shareholders it wishes to sell, in the second place. In any case, the bank wants to buy as much as possible, since did not condition the takeover bid on a minimum acceptance. If it does not reach 100% by this operation, the bank will be able to increase its participation later without having to launch a new takeover bid.

Thus, the instability of the lira, which penalizes BBVA on the stock market because of the poor prospects it brings to its activity in Turkey, also has a positive effect for the bank, which is the drop in the takeover bid. Something that has been happening since the moment of the announcement, as EL ESPAÑOL-Invertia reports.

Out of stock

There is not such good news for himto BBVA shares. During the first days following the announcement of the takeover bid, the bank suffered a strong stock market crashbecause it coincided in time with monetary policy decisions (in particular, rate cuts) that triggered the volatility of the lira and in recent weeks it has been penalized by a drop of 12% (from the moment of announcement).

Although it is true that then the value was at its maximum and came from living a real rally the previous weeks, the truth is that the fall is greater than that of its competitors (Santander 4.9% drop and CaixaBank depreciates by 1.35% over the same period).

And it is that heThe strong dependence on emerging markets that this takeover will give the group, the volatility of the lira and, in particular, Erdogan’s interference in the policy of the Central Bank of Turkey raise doubts among investors and it shows on the stock market. A very different vision from that of its managers, who considered at the time of the announcement that the volatility of the lira is a “short-term” problem.

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