3rd UPDATE: BBVA Profit Down On Weak Spain; Mexico Improves
October 27 2010 - 9:56AM
Dow Jones News
Banco Bilbao Vizcaya Argentaria SA (BBVA) Wednesday reported a
17% drop in third-quarter net profit as lending margins got
squeezed at its Spanish retail banking operations and as costs
rose, offsetting growth in Mexico.
BBVA, the country's second-biggest bank by assets behind Banco
Santander SA (STD), said net profit for the quarter was EUR1.14
billion compared with EUR1.38 billion a year earlier.
Net interest income--BBVA's main source of earnings--fell 5.5%
to EUR3.25 billion. Net interest income is the difference between
what a bank charges for loans and what it pays on deposits and for
other sources of funding. Both figures were slightly weaker than
analysts had expected.
Chief Operating Officer Angel Cano said BBVA expects lending
margins to remain under pressure in coming quarters, before
recovering in the second half of next year. Spanish lenders are
outbidding each other for deposits, while lending is growing at
snail's pace at some banks and contracting at others, as the
economic downturn continues to weigh on economic activity in the
country.
"Times in the banking sector aren't easy, and they will remain
that way in coming quarters," Cano told a conference call.
Analysts also zoomed in on these problems. "The biggest concern
for us in these figures is falling net interest income," Societe
Generale bank analyst Patrick Lee said. He said that this
compression to lending margins is likely to weigh on Spanish bank
earnings "for quite a while." Societe Generale rates BBVA at
hold.
Still, the bank was relatively sanguine on the bank's prospects.
Chief Financial Officer Manuel Gonzalez Cid said that banking
activity in Mexico and South America is picking up pace quickly.
"The trends are promising," he said.
Banks in the third quarter are taking a hit from new and
stricter provisioning rules imposed by the Bank of Spain. BBVA said
it had to set aside an extra EUR198 million as a result of the
change in provisioning rules.
As expected, BBVA's operations in Spain and Portugal weighed on
the group's earnings with a 15% drop in profit to EUR501 million.
In Mexico, BBVA's other large market, profit rose 5.1% to EUR451
million. The Spanish bank owns Mexico's biggest lender, BBVA
Bancomer.
The bank's operating costs rose 12% to EUR2.26 billion, mainly
due to higher rental costs. BBVA in recent quarters has booked a
little more than a billion euros in capital gains on the sale and
leaseback of its Madrid headquarters and its Spanish branch
network, and that operation raised the bank's rental costs
significantly.
The amount of bad loans on BBVA's books stood at 4.1% of total
loans in September, slightly lower than the 4.3% it had reported at
the end of 2009, but still higher than the 3.4% ratio it reported a
year earlier. It said that the pool of souring loans in Mexico have
started to shrink as the economy recovers from a sharp recession
last year, while in Spain it remained stable in the latest
quarter.
BBVA in the fourth quarter last year took huge write-downs and
reclassified shaky--but still-performing--loans as non-performing,
in an effort to clean up the balance sheet and isolate its troubled
loans. As a result, profit that quarter tumbled and bad loans
soared. "We wanted to remove the dark clouds from the horizon, and
that's what we did," COO Cano said. He said that while other
Spanish banks continue to report rising bad loans, BBVA's peak came
in that quarter, and it will remain stable or drop slightly in
coming quarters.
Other worries remain. Analysts questioned BBVA management on the
rationale over its ongoing talks to take a stake in Turkey's
Turkiye Garanti Bankasi AS (GARAN.IS), a deal that most analysts
believe will involve a capital increase. People familiar with the
talks have told Dow Jones Newswires that BBVA is seeking to gain
control of Turkey's second-biggest bank by assets.
COO Cano declined to discuss these talks, though he did say that
BBVA only does deals where they have a clear path to control.
BBVA's stock traded lower on the results. At 1322 GMT, it was
down EUR0.20, or 2%, at EUR9.44.
The bank's shares are down 23% since the beginning of the year,
and has fallen sharply in recent sessions after it said it was in
talks to buy a stake in a large Turkish bank.
-By Christopher Bjork; Dow Jones Newswires; +34913958123;
christopher.bjork@dowjones.com
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