After the euro debt crisis, BBVA, Spain’s alpha-lender, sought greener pastures in the Emerging Markets. That bet is coming home to roost.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Few, if any, global banks have bet as large, or as recklessly, on fast-growth emerging markets as Spanish lender BBVA. In the first half of 2018 its subsidiaries in Turkey, Mexico, Argentina, and other Latin American economies provided roughly half of its revenues and over 60% of its global operating profits. Now, with the current emerging market downturn deepening and contagion spreading from one market to another, BBVA is beginning to pay the price for its elevated exposure.

The bank’s shares, at €5.20 a share, have plunged 18% since the beginning of August, when the crisis in Turkey first came to a head, and are down 26% year-to-date. The bank’s debt is also getting more costly to service. The main reason is BBVA’s exposure to roughly €76 billion of Turkish assets, through its ownership of around half of Turkey’s third largest lender, Turkiye Garanti Bankasi AS. Many of those assets are loans to Turkish companies denominated in foreign currencies, making them much more difficult to service as the Turkish lira crumbles.

Last week, a BBVA spokesperson reported that senior executives at the bank now saw the cost of ensuring BBVA’s loan book in Turkey against risks rising to 200 basis points in 2018. That’s 50 basis points higher than the last estimate, in July. The bank has also revised down its economic growth forecast for Turkey and has acknowledged that the potential impairment risks in Turkey’s energy and real estate sectors, to which BBVA is highly exposed, are higher than originally estimated.

In terms of its operations in Mexico, where it employs 37,000 employees, or 28% of its global workforce, BBVA announced that it would cut 1,500 jobs. BBVA’s Mexican subsidiary, Bancomer, provides over a quarter of the group’s gross global revenues and around 45% of its operating profits.

The bank’s official reason for the redundancies is that it forms part of its root-and-branch (if you’ll excuse the pun) digital transformation, which has led to a declining need for human workers.

BBVA has bet heavily in recent years on digital technologies. In 2015 the bank’s chairman, Francisco González, said he intends to transform BBVA from a bank into a software company. To that end, the bank has invested over $1 billion in acquiring a string of fintech companies, including Finnish start-up Holvi, online UK bank Atom, North American start-up AZLO, and part of Berlin banking platform solarisBank.

A few months ago, BBVA said it was on the verge of enlisting Artificial Intelligence “agent” Amelia to take over many of its customer support functions. The technology had already been trialed at BBVA’s call center in Mexico to address customer complaints and inquiries. The bank’s long-term plan, however, is to broaden the application of AI to other markets and areas, as the bank seeks to digitize sales, advisory and support services.

According to its makers, New York-based IPsoft, Amelia is capable of detecting and adapting to caller’s emotions, as well as making decisions in real time. It can even suggest improvements to the processes for which ‘she’ has been trained. Incidentally, most all the jobs that have been cut in Mexico are front-office customer service positions, so it is perfectly possible that Amelia is beginning to make ‘her’ presence felt in new areas of BBVA’s corporate structure.

Nonetheless, the timing of the Mexican layoffs is still suspicious, coinciding with arguably the biggest threat BBVA has faced since the euro debt crisis (2010-12), during which time its shares slumped from over €13 to €4.66, their lowest point this century. Like many European financials, those shares have failed to stage any kind of convincing, enduring recovery since then. Now, after a month-and-a-half of Turkish turmoil, they are once again sinking fast, and are just 53 cents away from setting a brand new low.

The Bank of Turkey’s monetary policy committee is scheduled to meet this Thursday. Senior managers at BBVA have repeatedly called on the Bank of Turkey to hike rates to halt the Lira’s depreciation. “Something has to be done about interest rates,” Ali Fuat Erbil, chief executive officer of Garanti said. “Besides fiscal discipline, monetary tightening is the remedy. Is there need for that? Yes there is.”

The central bank has already pledged to raise interest rates in order to combat inflation, which soared to 17.9% year-on-year in August, and halt, or at least slow, the Lira’s downward spiral. But will it be enough? Will Turkey’s ruler, Recep Tayyip Erdoğan, a self-described “enemy of interest rates,” allow the central bank to raise the benchmark rate high enough to have a chance of stabilizing the currency, in the knowledge that such a measure will almost certainly put an end to the extended era of debt-fueled economic growth Turkey has experienced under Erdogan’s rule?

But Turkey’s not the only emerging market headache affecting BBVA. There’s also Argentina, whose currency continues to collapse despite the IMF pledging to bailout the country’s dollar-debt to the tune of $50 billion. BBVA has roughly 5% of its operating revenues at stake in the country. According to one source, the situation there is now so worrisome that the ECB has demanded to be kept abreast of the risk exposure Spain’s two alpha banks, Santander and BBVA, have to Argentina.

Spain’s market regulator, the CNMV, also wants to know the extent of the losses racked up so far in Argentina. According to BBVA, the problems are very much under control: iIs investments are well-hedged and its Turkish and Argentinean operations are siloed from the rest of the company. Plus, its other markets, in particular Mexico, are doing just fine, and there is, as always with a big heavily exposed bank, nothing to worry about. By Don Quijones
 

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