By Jesús Aguado
MADRID (Reuters) - BBVA on Monday reported a 10 percent drop in first-quarter net profit, which was hit by extraordinary impairments in the United States due to slower growth expectations, and a sluggish performance in Spain and Turkey.
Those elements took the shine off a strong performance in Mexico, the main market for Spain's second-largest bank.
Net profit totalled 1.16 billion euros (1.00 billion pounds) for January-March, just above an average forecast of 1.15 billion euros in a Reuters poll of analysts.
Like domestic rival Santander, BBVA makes most of its profit overseas, a model that helped it withstand two recessions at home in recent years.
However, economic recession and political instability in Turkey, its fourth- biggest market, have dented group profitability. First-quarter net profit in Turkey, which accounts for about 10 percent of group earnings, fell 29 percent to 142 million euros, it said.
The lira tumbled nearly 30 percent in 2018 as a currency crisis tipped Turkey's economy into recession. It has ebbed another 10 percent this year.
On Thursday the central bank left interest rates unchanged at 24 percent as expected but dropped a previous reference to possible tightening to address inflation, a dovish shift that further hit the Turkish lira.
MEXICO GROWTH DRIVER
In Mexico, where its makes more than 40 percent of its earnings, net profit rose 10.5 percent, underpinned by a benign economy and a steady increase in lending volumes.
Earlier in April Santander offered to take full control of its Mexican business through a 2.6 billion euro all-share deal which would bring it head to head with BBVA.
In the United States, which accounts for 9 percent of the group's earnings, net profit fell 35 percent after impairments of 162 million euros in the quarter.
"We do expect some cyclicality to kick in 2020 and beyond (...) the expectation has come down," Onur Genç, BBVA's chief executive officer said at a news conference. "Due to regulatory accounting standards we have to reflect it in our expectations of risk costs." The bank's cost of risk, which reflects the premium for insuring its loan book, rose in the quarter to 106 basis points from 39 basis points in the previous quarter.
In Spain, net profit rose 14.6 percent while net interest income, a measure of earnings on loans minus deposit costs, declined year on year and from the previous quarter owing to fierce lending competition.
Ultra-low interest rates and the impact of new international accounting rules squeezed its margins.
Overall, BBVA's net interest income rose 3 percent year on year to 4.42 billion euros, in line with analyst estimates, but was down 5.8 percent against the previous quarter.
BBVA finished March with a core Tier 1 capital ratio of 11.35 percent compared with 11.34 percent at the end of December.
(Reporting by Jesús Aguado; Editing by Susan Fenton/David Goodman/Jane Merriman)