BBVA : Emerging concerns, but remaining strengths. Buy recommendations maintained on Tier 2 2027 and AT1

We hosted BBVA at our Spanish forum this week; unsurprisingly, the situation in emerging markets (and particularly Turkey) was a very important theme, and focuses investors’ questions and concerns. 39% of BBVA’s total assets are in emerging markets (of which 10.9% in Turkey, 13.6% in Mexico and 2% in Argentina) but they generate 61% of consolidated income in 1Q18 (16.1% in Turkey, 27.6% in Mexico and 2% in Argentina). - Although substantial depreciation in local currencies year to date (essentially Turkish lira which has fallen 16% vs EUR and 17% vs USD, Mexican peso has been fairly stable to date) are putting pressure on the performance of local subsidiaries, we believe a number of mitigating factors should enable BBVA to withstand the current turbulence unscathed. First of all, hedging in place protects a substantial part of earnings and most of the capital. Local subsidiaries have solid fundamentals and could endure deteriorated operating environments. Uncertainties in Mexico (elections and NAFTA) have eased, the Turkish situation is well-known and appear manageable under current assumptions while Argentina, clearly more distressed, is negligible to the group. Last but not least, the economy in Spain (48.5% of total assets and 25.7% of income) has reported improved performance and the trend should continue. Also, the disposal of the foreclosed Spanish real estate assets to Cerberus (announced late 2017) will be positive to BBVA’s asset quality and earnings. - Under current assumptions, we are confident enough that BBVA’s credit strengths will offset the strains in emerging markets, and maintain our Stable Credit Opinion and market recommendations. On the senior preferred and non-preferred segments, yields are just fair, in the absence of outperformance expected of the bonds, we have Neutral recommendations. We maintain our Buy recommendation on the Tier 2 3.5% 2027 (Baa3/BBB+) given the attractive YTM (2.49%). We also keep our Buy recommendation on the EUR AT1 (Ba2/BB) given good YTC relative to large ADI, resilient capital position (allowing comfortable distances to triggers) and low extension risk. We would consider potential volatility in the short-term as investment opportunities given the longer term healthy prospects for BBVA. - >Supporting factors - - Highly diversified geographical franchises with strong positions in core markets allowing for proven resilient earnings generation and steady capital ratios.- Solid economic recovery in Spain will improve the relative but also absolute contribution of the domestic operations to group’s earnings.- Moderate risk appetite and strong risk control culture across the group, allowing for weathering adverse operating conditions. Points to watch - - Current turbulences in emerging markets (particularly Turkey and Mexico) needs to be closely watched as unexpected negative events could affect BBVA’s debt spread.