In the Midst of a Difficult Environment, BBVA’s Q3 Profits Fall

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Spain’s Banco Bilbao Vizcaya Argentaria (BBVA) earned EUR 146 million ($185 million), or EUR 0.03 per share, and an annualized 1.4% return on equity. Sequentially, the bank’s bottom line fell 70% because of higher Spanish assetimpairment losses and a non-cash badwill charge related to the acquisition of Unnim Banc, which BBVA acquired for EUR 1. Losses on Spanish real estate assets are far from over and the outlook for BBVA is largely unchanged.

As has happened for some time, BBVA’s operations outside Spain helped the bank avoid significant losses. In the first nine months of 2012, Mexico, South America, Eurasia, and the United States contributed EUR 1.3 billion, EUR 1.0 billion, EUR 0.8 billion, and EUR 341 million, respectively, to the group’s bottom line.

In contrast, Spain posted a EUR 532 million loss. We think this trend is far from reversing as BBVA’s credit quality remains challenged, especially in its home country. In September, total nonperforming loans ascended to 4.8% of the portfolio from 4.0% in June. Notably, the NPL ratio in Spain went up more than a full percentage point quarter on quarter, to 6.5% from 5.1%.

The majority of this increase was due to the incorporation of Unnim’s bad assets, however, which carry a generous loss-sharing protection plan. Still, we think the peak in NPLs is several quarters away and both recurring and government-mandated provisions (BBVA still has to set aside one third of its requirement) will remain elevated for some time.

Despite BBVA’s strong recurring revenue, credit losses will keep profitability quite subdued. This will slow internal equity generation. However, absent a Spanish debt restructuring, BBVA should not need to tap the capital markets to replenish its capital position. Indeed, like Santander SAN , BBVA did not show a shortfall in capital after the latest round of stress tests. As at Sept. 30, the bank’s core capital ratio was 10.8%, flat with the June quarter.

 

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