Turkish Market Rout May Have Consequences for Eurozone Banks

There are pockets of weakness among the Eurozone banking sector Monday, with Spanish banks in particular trading poorly. BBVA has traded lower by as much as 7%, with CDS prices shooting higher as markets eye exposure to Turkish debt among the Eurozone's larger lenders.

• Most notably, the Spanish banking system has considerable exposure to the Turkish economy. At the end of 2020, the BIS estimated that Spanish banks were by far the most exposed to Turkey, with $64bln in total loans.
• The vast majority of the Spanish exposure to Turkey comes from BBVA, through their local subsidiary Garanti, which represents 10% of the group's profit.
• Despite the sell-off in BBVA and Spanish banks, the risk may be negligible due to the following 2 reasons:
  1. Sources speculate that BBVA does not hedge either their capital or risk-weighted assets of Garanti, hence if the TRY depreciates by 10% (relative to EUR), the CET1 ratio remains stable and the exposition of BBVA on Turkey decreases by 10%.
  2. Should the situation deteriorate further, BBVA's point of entry into Turkey is structured in such a way that the bank could deconsolidate the subsidiary, leaving BBVA's capital ratio (ex-Garanti) stable.

Source: BIS/MNI