Why the TRY Depreciation Matters (A Bit) For Spanish Banks

• Earlier this year, we showed that the Spanish banking system has had 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, $64bn in total loans ($10bn is due within a year).
• The vast majority of the Spanish exposure to Turkey comes from BBVA, through their local subsidiary Garanti, which represented 14.4% of the group's net profit in 2019 ('normal' economic year).
• Hence, the rise in political and economic uncertainty in Turkey has been impacting BBVA equity in recent weeks amid the aggressive TRY depreciation.
• BBVA is down 17% this month (from peak to trough), while Spanish banks are down 10% and Euro banks are down 6% (SX7E index), clearly indicating that BBVA carries idiosyncratic risk due to Turkey's current critical situation.
• Even though some analysts are still not very concerned on BBVA and Spanish banks outlook (question of profitability and not of solvency for BBVA), further deterioration in Turkey risky assets and the TRY could keep the selling pressure elevated on Spanish banks in the short term.
• In addition, the worsening economic outlook amid rising Covid uncertainty combined with the significant rise in LT interest rates could also start to weigh on banks' profitability in the near term.

Source: BIS/MNI