One month after upping its bet on Turkey, BBVA assumes the impact of runaway inflation in the country. The group has revealed that applying hyperinflation accounting will cost it 324 million euros of the profit declared in the first quarter. But it will also have immediate effects on two key financial metrics: It will wipe out more than three percentage points of profitability at once, and it will worsen the efficiency ratio by more than four points.
BBVA will apply accounting for hyperinflation in Turkey in the second quarter, with effect from January 1 of this year. In countries with hyperinflation, the international accounting regulation includes a special calculation of results due to the loss of value of the local currency. The international norm establishes as one of the criteria to adopt a hyperinflationary accounting when the accumulated CPI exceeds 100% in a period of three years. In Turkey, this assumption was fulfilled in February 2022.
The Turkish subsidiary will go from being the group’s third market to a zero contribution”
The group has already had to apply this accounting standard in other subsidiaries such as Venezuela and Argentina, although these are less important markets for BBVA than Turkey. Without going any further, the Turkish subsidiary was until now the third market that contributed the most profits to the group, with around 13%.
This year its contribution will become “immaterial”, according to the entity, which estimates that inflation will close the year at around 60%. In May, Turkey’s CPI stood at 73.5%. For Pimco, the largest active fixed income manager in the world, the errors in the approach of the policies of the Central Bank of Turkey have aggravated the problem of price mismatch. In the first quarter of the year, the Turkish subsidiary has gone from earning 249 million to red numbers of 75 million after the accounting change.
This reformulation of the accounts has already had a considerable impact on the return on tangible equity, known as ROTE, and on the efficiency ratio, which measures the level of expenses over income. BBVA has corrected the ROTE to 12.7% compared to the 15.9% declared in April and has also worsened efficiency from 40.7% to 44.8%. Profitability has regressed to December 2021 levels and the level of costs over income worsens to the level of a year ago. These new metrics will make it difficult for the group to meet its roadmap for 2024, when it expects to reach a ROTE of 14% and an efficiency of 42%.
Goodbye to a contribution of 200 million per quarter
It should also be borne in mind that the almost zero contribution of the business in Turkey will last throughout 2022, with its effects above all on profitability. In 2021, Garanti contributed an average of around 200 million per quarter. However, BBVA reaffirmed these financial objectives to the CNMV after communicating that it will apply hyperinflationary accounting. The group relies mainly on the pull of income in Europe, especially in Spain, due to the rise in interest rates, which will begin to materialize in July.
The accounting adjustment for the incessant rise in prices coincides with the year in which the leadership reinforced its commitment to Turkey. The entity has increased its stake in Garanti from 49.85% to almost 86% after launching a voluntary takeover bid on the percentage it did not control. For this, it invested 1,410 million euros.
BBVA landed in Turkey in 2011 with the purchase of 25.01% of Garanti from Dogus and General Electric. In 2015, BBVA became the first shareholder, increasing its stake to 39.90% through the purchase of an additional package of shares from Dogus. In 2017, BBVA raised its bet to 49.85%.
BBVA’s management team defends Turkey as a strategic market due to the growth potential of the economy, the low level of bank penetration of a population of more than 85 million inhabitants and the commercial ties with Europe.
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