BBVA sees further deterioration in South America, overshadowing Q3 profit gain

By Jesús Aguado

MADRID (Reuters) -Spanish banking group BBVA expects further asset deterioration in South America by the end of the year, it said on Tuesday, due to worsening economic conditions and pressure from higher interest rates.

The outlook for South America together with a jump in provisions and a loss in Turkey overshadowed the group's 13% rise in third quarter net profit, driven by higher lending income in Spain and Mexico.

The net profit of 2.08 billion euros ($2.20 billion) was slightly better than 2 billion euros expected by analysts. Provisions, however rose 29% year-on-year to 1.21 billion euros, slightly above the 1.14 billion euros expected by analysts polled by Reuters.

At 1039 GMT, BBVA shares were down 1% after gaining close to 13% in the last six months.

In an uncertain environment, the bank's cost of risk, which measures the credit risks and potential losses for the bank, rose by 7 basis points in the July-September quarter to 111 (bps).

Higher provision needs in South America and Mexico forced BBVA to raise its cost of risk guidance to "slightly" above the current 111 bps for 2023 from previously around 100 bps.

"The core geographies we are in like Peru or Colombia have seen a macro deterioration" and that is behind a worse outlook, the bank's Chief Executive Onur Genç told analysts.

In that context, the bank also revised upwards its cost of risk guidance for South America - where net profit fell 37% in the quarter - to around 250 bps for 2023 from a previous guidance of 225 bps.

Brokerage Jefferies said that solid underlying trends in Spain and Mexico "were slightly obscured by large hyperinflationary accounting adjustments in Turkey."

MEXICO AND SPAIN STRONG, TURKEY BOOKS LOSS

BBVA has relied on Mexico in the past to cope with tough conditions in Europe, but is now also benefiting - like European rivals - from higher interest rates on its home continent.

At a group level, BBVA's net interest income (NII), or earnings on loans minus deposit costs, rose 22.5% year-on-year to 6.4 billion euros in the quarter. Analysts expected an NII of 6.05 billion euros.

Higher earnings helped push BBVA's return on tangible equity ratio (ROTE), a measure of profitability, to 17% in September from 16.9% in June. It forecast a high-teens ROTE for 2024.

In Mexico, the bank's net profit rose 21% while NII climbed 30% in the quarter supported by higher lending activity despite higher funding costs.

In Spain, net profit jumped 75%, while NII was up 62%.

Margins in its home market were helped by a rise in customer spreads to 333 bps compared with 312 bps in the second quarter as higher returns on loans offset a smaller rise in deposit costs.

In this context, the bank raised its NII growth guidance in Spain to 50% for 2023 from between 40% and 45% in its previous guidance.

In Turkey, where BBVA shifted to hyperinflation accounting in 2022, and the bottom line was affected by a higher tax rate, the lender booked a loss of 158 million euros. NII fell 25.6%.

In terms of solvency, BBVA finished September with a core tier-1 fully loaded capital ratio, the strictest measure of solvency, of 12.73%, down from 12.99% in June following the impact from the 1 billion euros share buyback announced in July.

(Reporting by Jesús Aguado; editing by Inti Landauro, Jason Neely and Susan Fenton)