BBVA Warns of South American: Spanish banking group BBVA is bracing for further asset deterioration in South America by year-end. The region’s economic conditions, coupled with pressure from rising interest rates, are contributing to this outlook. Despite posting a 13% increase in third-quarter net profit, largely due to higher lending income in Spain and Mexico, BBVA’s concerns about South America, a rise in provisions, and losses in Turkey have dampened the group’s performance.
While the net profit of 2.08 billion euros ($2.20 billion) slightly exceeded analysts’ expectations, provisions rose 29% year-on-year to 1.21 billion euros, slightly above the 1.14 billion euros expected by analysts.
BBVA shares were down 1% following this news, despite having gained nearly 13% over the past six months. The bank’s cost of risk, which measures credit risks and potential losses, increased by 7 basis points in the July-September quarter to 111 basis points.
BBVA has raised its cost of risk guidance to “slightly” above the current 111 basis points for 2023, up from a previous estimate of around 100 basis points. The bank cited macroeconomic deterioration in core South American geographies, such as Peru and Colombia, as the reason for the downward outlook.
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BBVA, like other European banks, is benefiting from higher interest rates in its home continent, having traditionally relied on Mexico to navigate difficult European conditions. At the group level, the bank reported a 22.5% year-on-year increase in net interest income (NII), reaching 6.4 billion euros for the quarter.
Analysts had expected an NII of 6.05 billion euros. This rise in earnings has bolstered BBVA’s return on tangible equity ratio (ROTE), a measure of profitability, which reached 17% in September, up from 16.9% in June. The bank forecasts a high-teens ROTE for 2024.
In Mexico, BBVA saw a 21% increase in net profit, and NII climbed 30% during the quarter. In Spain, net profit surged by 75%, while NII increased by 62%. In Turkey, where BBVA shifted to hyperinflation accounting in 2022, the bank reported a loss of 158 million euros, with NII falling by 25.6%.
In terms of solvency, BBVA closed September with a core tier-1 fully loaded capital ratio of 12.73%, down from 12.99% in June due to the impact of a 1 billion euro share buyback announced in July. The bank remains cautious about the challenging economic conditions in South America and the effects of rising interest rates on its assets in the region.