DBRS: Garanti Reinforces BBVA’s International Franchise; Helps Offset Modest Domestic Earnings

DBRS Rating Limited, today commented that the announcement by Banco Bilbao Vizcaya Argentaria, S.A. (BBVA or the “Group”) of an increase in its stake in Turkish Garanti Bank (Garanti) is a confirmation of the Group’s commitment to strengthen its international franchise. BBVA announced on 19th November 2014 that it had agreed to increase its stake on Garanti to 39.9% from 25%. After regulatory approvals, which are expected to be completed in 1H15, BBVA will gain management control of Garanti, which will be fully consolidated into the group. DBRS views the transaction as currently having no rating implications for BBVA.

DBRS considers BBVA’s increasing stake in Garanti to be a significant acquisition as it will represent about 12% of total group assets at end-September 2014 after the transaction is completed. To support the transaction BBVA has already completed a EUR2 billion accelerated book build which will fully compensate for the negative impact on regulatory capital of the full consolidation of Garanti.

DBRS sees the transaction as providing extra revenue diversification away from BBVA’s domestic operations in Spain, where profitability remains modest partly impacted by the low interest environment, very low domestic demand for credit and still fragile economic and property market environment. According to BBVA’s management, Garanti is expected to contribute to around EUR 250 million of net attributable income from 2016. BBVA’s net attributable income in 9M14 was EUR 1.9 billion.

However, the full consolidation of Garanti’s assets into BBVA will change the quality of the group’s equity and regulatory capital, with minority interests increasing to circa 15% of the group’s equity base and risk weighted assets increasing by 13%. BBVA estimates the fully loaded common equity tier (CET) 1 ratio to be around 9.6% after incorporating Garanti, partly supported by minority interests which are considered by DBRS as less good quality capital.

DBRS notes that Garanti consolidates the group’s international franchise in Turkey, in addition to BBVA’s strong international presence in Mexico, South America and U.S. Overall risks from the transaction are considered to be manageable for BBVA given the group’s long track record of acquisitions internationally and the fact that it has been present in the shareholder structure of Garanti since 2011. However, DBRS also sees that the transaction will also further expose BBVA to developments in Turkey, including geopolitical risk, economic and operating environment and potential stricter regulatory requirements.

Before the transaction, BBVA held a 25% stake in Garanti since 2011 in partnership with a major Turkish shareholder, Doğuş. After the transaction, which is pending regulatory approvals, Doğuş will retain a 10% stake in Garanti and BBVA will hold management control and represent 7 out of 10 members of Garanti’s board of directors. Garanti is the second largest bank by total assets in Turkey, where it has a large commercial franchise of 987 branches.

DBRS currently rates BBVA’s Issuer & Senior Debt and Deposits at A with a Negative trend.

Notes:
All figures are in Euro unless otherwise noted.