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Too little capital, too much risk. That has been the bearish case against BBVA in recent years. Asset sales could fix the capital issue. The perception of risk will be harder to shift, in part because of the bank’s own strategy.
On Tuesday, the Spanish bank confirmed the sale of its 68 per cent stake in BBVA Chile to Scotiabank of Canada for $2.2bn. That came just a few days after it offloaded 80 per cent of a foreclosed property portfolio to Cerberus, the US private equity group, for €4bn.
Both deals make sense. The Cerberus transaction gets BBVA away from owning physical real estate. The Chilean disposal strengthens capital; it will add about 0.5 percentage points to core equity tier one capital, taking it to a more reassuring 11.8 per cent of risk-weighted assets. Or at least, it would if the proceeds were deployed to boost capital. All the signs are that they will go instead towards growth — either via acquisitions or further investment in digitalisation, an area where BBVA is already a pacesetter.
In a sense, this is laudable. Investors buy shares because they are prepared to stomach higher risks for greater returns. Banks will not generate much alpha sitting around waiting for European interest rates to rise, a slow process to even begin before the middle of 2018. Better to drive profits by cutting costs at home and investing in faster growth and more lucrative markets overseas.
There are two issues with this thesis. One is that, rightly or wrongly, two of BBVA’s biggest overseas markets suffer from elevated perceptions of risk. Business on the ground in Turkey and Mexico — 21 and 37 per cent, respectively, of operating profit in 2016 — may be doing fine. But Turkey’s currency is down 17 per cent against the euro in a year amid a crackdown on dissent. Mexico is vulnerable to intemperate Twitter outbursts from north of the Rio Grande; President Trump talks of dismantling Nafta and building a wall along the US border.
The other, perhaps related, issue is that evidence of market acceptance is mixed. BBVA’s shares trail the Euro Stoxx banking index over one, three and five-year periods. Its price to tangible book value is lower than Santander’s. BBVA may be committed to growth. But while recent quarterly results have been solid, it appears investors are not yet sufficiently persuaded to pay up for it.
The Lex team is interested in hearing more from readers. Is BBVA’s strategy bold or excessively risky? Please tell us what you think in the comments section below.