EUR 850.00 For Business Accounts Only

Morningstar | Banco Bilbao Vizcaya Argentaria Fiscal-Year 2018: Resilient Results in a Challenging Environment

Banco Bilbao Vizcaya Argentaria reported net attributable profit of EUR 5.3 billion for the 2018 fiscal year. Unadjusted, this represents a 51% increase on 2017; however, if we exclude some large non-recurring items in both the 2017 and 2018 fiscal years, the underlying earnings growth decreases to 7%. This was in line with our and consensus' estimates. We maintain our narrow moat rating, mainly due to the cost advantages and switching costs that its Mexican operation BBVA Bancomer enjoys in its home market. We decrease our fair value estimate for BBVA to EUR 5.90 from EUR 6.30 previously.

Fallout from the Turkish crisis is still relatively well contained, 50% controlled subsidiary Garanti remained marginally profitable in the final quarter of 2018, despite loan loss provisions increasing fivefold compared with the fourth quarter of 2017. BBVA expects that Garanti will keep its loan loss provisions below 300 basis points of customer loans in 2019, compared with 244 basis points in 2018. It is worthwhile pointing out to investors that Garanti booked only one quarter of 2018's loan loss provisions in the first half of 2018, so there will be a significant base effect as Garanti will book significantly higher credit losses in the first half of 2019, this will however smooth out over the full year if Garanti can manages to deliver on the sub-300 basis points guidance. Turkey contributed 10% to BBVA's attributable profits in 2018.

Most banks pay lip service to digitalization in results presentations nowadays, nearly all banks will have some metric showing its increased use of online and mobile distribution channels and the positive impact that technology has on its cost base. It is very difficult to evaluate these claims and to rank the various banks. We do however believe that BBVA is ahead of its peer group in adopting digital solutions. It was one of the first global banks to place digital at the centre of its strategy.

BBVA Bancomer, BBVA's highly profitable Mexican operation, is central to our narrow moat rating and our investment case for BBVA. In 2018, BBVA generated 42% of its profit in Mexico. We therefore share some of the markets concerns around the reform proposals on banking fees by the newly elected Mexican administration. We do, however, believe that concerns are overdone. It is our understanding that if the proposals are accepted as it stands today it would reduce BBVA Bancomer's revenue by around 3%, which is around 1% of overall group revenue. If we assume no decline in costs the lower revenue would translate into 4% lower group earnings. In a highly concentrated market such as the Mexican market, banks are normally able to make up lost fees in other avenues by pricing services differently.