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Moody's Affirms Banco Bilbao's (BBVA) Ratings and Outlook

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Moody’s Corporation’s (MCO - Free Report) subsidiary, Moody’s Investors Service, has affirmed Banco Bilbao Vizcaya Argentaria, S.A.’s (BBVA - Free Report) ratings and outlook in its recent rating activity. While long-term deposit and senior unsecured debt ratings have been maintained at A2 and A3 respectively, baseline credit assessment (BCA) and adjusted BCA have been affirmed at baa2.

Further, outlook has been maintained at ‘Stable’ for Banco Bilbao, as well as its subsidiaries (except its Turkish subsidiary).  However, for its Turkish unit, Turkiye Garanti Bankasi A.S. (Garanti), the long-term deposit and debt ratings have been downgraded to B1 from Ba3.

This reiteration highlights the bank’s robust credit profile amid deteriorating operating environment in Turkey.  Solid performance by the bank’s domestic as well as other units is expected to offset any weakness in the Turkish branch’s performance.

Rationale behind Ratings and Outlook Affirmation

Moody’s expects the bank’s asset quality and profitability to improve, backed by the decent performance put up by its units. This remains the major reason behind the BCA rating affirmation.

In addition, Banco Bilbao’s business is geographically diversified, wherein the Turkey operations constitute only 12% of the bank’s loans and net profits as of Jun 30, 2018. This will ensure that   BCA is affected only in case of a severe disruption in its Turkey business.

Banco Bilbao’s strategy of hedging regulatory capital and expected profit contribution ensures lower foreign exchange risk.  The bank has already hedged around 50% of its expected 2018 earnings. As a result, fall of 10% in Turkish Lira will impact the bank’s CET 1 capital by only two basis points (bps). Further, even if Banco Bilbao loses equity in its Turkish subsidiary, it will still have a CET 1 ratio of 11.03%, shrinking only 34 bps. Nonetheless, the ratio will remain above the 2018 SREP requirement of 9.25%.

Asset risk for the company’s domestic assets has reduced significantly, owing to the economic growth in the region. Sale of real estate assets is expected to result in lower provisions and losses, which will lead to higher profitability.

Banco Bilbao’s internal policies require subsidiaries to maintain sufficient liquidity, which, in turn, provides stability to the bank’s liquidity and funding activities.

Advanced Loss-Given Failure (LGF) analysis also remained unchanged, which further affirms long-term deposit and senior unsecured debt ratings at A2 and A3, respectively. Moody’s modest expectation of government support for Banco Bilbao also led to the reiteration.

Shares of BBVA have declined 24.6% year to date compared to the 12.2% fall registered by the industry it belongs to.



Currently, the stock carries a Zacks Rank #3 (Hold).

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