Analyst Note| Johann Scholtz, CFA |
Narrow-moat BBVA reported net attributable profit from continuing operations of EUR 1.3 billion for the first quarter of 2021, compared with the EUR 603 million it reported a year ago for the same period and 33% ahead of the EUR 907 million the consensus of analysts polled by BBVA’s investor relations expected for the quarter. A 57% year-on-year decline in loan-loss provisions supported the recovery in earnings. Loan-loss provisions also came in below consensus expectations and this combined with revenue, coming in 5% ahead of expectations, drove the earnings beat. Currency weakness and erratic Turkish monetary policy saw revenue and preprovision profits declining by 14% year on year. Local currency net interest income was under pressure in Mexico, Spain and Turkey, partially offset by a recovery in fee income and a very strong result from the trading of securities. The market has punished BBVA for its Turkish exposure recently. In the two days after the announcement that Turkish President Recep Tayyip Erdogan had replaced his minister of finance, BBVA lost 12% of its value, while Garanti--BBVA’s Turkish subsidiary--lost 27% of its euro market value. To place this into context, BBVA’s Turkish operation contributes only around 15% of BBVA’s attributable profit. It is important to note Garanti is fully self-funded: BBVA does not provide intergroup funding and BBVA’s theoretical balance sheet risk is therefore limited to its equity stake in Garanti. There have been renewed calls from some quarters for BBVA to dispose of its investment in Garanti. Garanti is a quality asset that has consistently generated a high-double-digit return on equity with relatively low earnings volatility. Currently Garanti trades at a 50% discount to its tangible book value. We do not believe it will be in the best interest of BBVA shareholders for BBVA to sell a quality asset at such a steep discount. We maintain our narrow moat rating and our EUR 5.90/share fair value estimate.