The logic of the purchase of Garanti is greater than the Turkish monetary chaos

0
28
The logic of the purchase of Garanti is greater than the Turkish monetary chaos
1637756189 637077 1637756299 rrss normal.jpg

The lira crisis is a stark reminder of the risks, but there are reasons for BBVA to keep going

In an ideal world, BBVA would have nothing to do with Turkey. But that is not where its president, Carlos Torres, is. The Spanish group already owns just under half of local lender Garanti BBVA, and last week it launched an offer to buy the rest. A currency crisis in the meantime is a stark reminder of the risks, but Garanti’s low valuation and ineffective status quo give it reason to keep going.

Torres offered 10 days ago 12.20 lira per share to the minority investors of Garanti, which represents a payment of 2,200 million euros. Since then, the Turkish lira has lost a fifth of its value against the euro, due to a cut in interest rates by the central bank for political reasons.

The crisis could hurt Garanti in two ways. First, a weaker lira makes it harder for borrowers to service dollar-denominated debt, increasing future defaults. Garanti has reduced its foreign currency exposures much faster than others, but at $ 11.6 billion (€ 10.3 billion), it is still almost a third of total loans.

Second, the unorthodox monetary easing raises the possibility of a massive rise in rates at some point in the future. That would reduce loan margins, as deposits instantly become more expensive and loans take longer to appreciate.

But the low valuation of Garanti, less than 4 times the benefits expected for 2022 according to the price of the BBVA offer, gives Torres a wide margin of maneuver. Next year’s earnings could fall 45% compared to the median of analyst forecasts compiled by Refinitiv, and it would still return 15% in lira, according to our calculations. Its profitability in euros should be maintained throughout currency fluctuations, as the hard currency value of BBVA’s offer and the future benefits of Garanti move in parallel.

SEE ALSO  Orange adds Max to its television offer

Most importantly, canceling the operation would leave Torres in the suboptimal position of consolidating Garanti’s assets, but not all of its capital. This regulatory quirk makes owning half the lender an inefficient use of the balance sheet. It also means that BBVA’s acquisition of the bank will cost you much less in terms of Common Equity Tier 1 than the value of the main offering. Leaving those benefits on the table when retiring would also make investors wonder if BBVA wanted to exit Garanti entirely, causing its value to decline even further. The best option for Torres is to duck his head and stay on course.