BBVA is cooking up good news at the end of 2022 The ‘bankasi’ shares soared 10% on the Istanbul Stock Exchange this Monday, to 31.62 liras, and have accumulated a revaluation of 110% since the takeover bid by its parent. It is on track to triple its value (+180%) in 2022 and its market capitalization reaches 132,300 million liras (6,700 million euros).
But the entity chaired by Carlos Torres has benefited only half of this increase in the stock market because it was not until May when it decided to complete the purchase offer and raised its stake from 49.85% to the current 86%. The takeover bid was made in November 2021 at 12.25 liras per share, although in April, with the operation underway, BBVA raised the price to 15 liras to offset the effects of the lira depreciation on the bank’s shareholders.
Since the takeover bid, Garanti’s price has more than doubled and the value of BBVA shares have also doubled in this period, up to 5,750 million euros. The Spanish bank invested only 1,400 million to get 36% of its subsidiary in the takeover bid, raising its stake from 49.85% to 86%, and the total volume invested in getting all that percentage over the last twelve years up to 8,314 million, according to data compiled by ‘La Información’ from the bank’s results.
Garanti, technically an investment in… capital gains
But that figure has been reduced by 3,224 million euros due to accounting impairments against equity recorded in its accounts during four consecutive years from 2018 to 2021. The positive impact on equity of IAS 29 (hyperinflation accounting standard) has allowed BBVA to give the return to the tortilla in Turkey to position itself, technically and unexpectedly, in capital gains.
Already in the first semester, the entity recorded a capital gain of 960 million euros, as emphasized by the auditor EY in his opinion sent to the CNMV that accompanied the bank’s accounts. From July to December, the blow to capital gains will be repeated until it touches 2,000 million, according to industry estimates. BBVA already consolidates 100% of Garanti’s results since the takeover bid and also the property.
The breakdown of this initial gross investment in Turkey was built into four sections: BBVA took a first 24.9% in November 2010 for 4,200 million. In July 2015, it put in another 1,854 million for an additional 14.9% and in March 2017 it again acquired another 10% for 860 million. The fourth tranche is that of this year’s takeover bid. Until then, the money in Garanti dragged significant numbers in the red in any period since the entry of BBVA due to the deep depreciation of the lira against the euro.
Argentina, the ‘hell’ chosen by Erdogan for Turkey
With its rise in the stock market, Garanti is managing to eclipse the hyperinflationary situation in Turkey, immersed in increases in the CPI of more than 80% year-on-year, which is only surpassed by the eternal Argentine drama, whose successive governments have never managed to recover the credibility of and trust investors and citizens in their currency. Like the Latin Americans, the Turkish currency has depreciated in a context of current monetary policy in which all the world’s central banks are raising rates to curb inflation except one: yes, the Turkish one.
The government of Recep T. Erdogan assaulted the central bank a little over a year ago and the monetary authority lost all its independence. The Central Bank of Turkey started lowering rates when they were close to 20% and has brought them to 9% last November. In that period, the increase in inflation has quadrupled from 20% to 80%. In turn, to finish feeding back the destructive vicious circle, the exchange rate of the lira has plummeted by more than 50% in these twelve months. The euro has gone from being worth 10 liras to standing at 20 in this short period of time.
In this terrifying scenario for the economy, BBVA is dealing with the situation using the strength of its balance sheet in the rest of the world, country-by-country isolation policies and ultra-conservative management by transporting portfolios of doubtful loans and raising capital buffers. According to Bloomberg, the capital buffers of the main Turkish banks were raised to 10 billion euros at the end of the third quarter in the face of the potential risk of a financial shock in 2023.
Some experts foresee that interest rates will multiply by almost four from 9% to 35% “as an increasingly probable scenario”, according to the agency, if there is a process of capital flight. Russia’s war in Ukraine and the strategic situation of Turkey as a NATO country and a partner of Moscow precisely stopped an event of these characteristics in the first months of this year. However, the imbalances in the Turkish economy do not make it doubtful whether the financial turmoil around the lira will repeat itself, the only question is when it will.