Narrow-Moat Banco Bilbao an Emerging-Market Champion

We believe that Banco Bilbao Vizcaya Argentaria will generate higher midcycle profitability than its peers, supported by its market-leading positions in attractive banking jurisdictions, notably Mexico. Due to its significant emerging market presence, investors often perceive BBVA as riskier than other European banks. There are, however, several mitigating factors for any higher country risk. First, BBVA tends to hold a dominant position in the countries it operates in, with significant market shares in low-cost demand deposits, supporting profitability. Secondly, BBVA is a retail and commercial bank with limited exposure to volatile investment banking activities. Thirdly, diversification across different geographies reduces earnings volatility and BBVA's earnings have historically been more stable than most other European banks we cover. We also highlight that BBVA's decentralised funding model limits its exposure to the equity investment in each subsidiary.