Banco Bilbao Vizcaya Argentaria

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

BBVA is a global financial services group, with a significant presence in Spain, Mexico, Turkey, and South America, providing retail banking, corporate banking, investment banking, and asset management services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BBVA’s Moat Assessment: 2/5 (Narrow Moat) BBVA’s moat is categorized as narrow, primarily stemming from its strong brand recognition and a moderately sized geographic network, especially in markets where it has high market share. However, it faces intense competition and lacks the unique economic advantages required for a wide moat, primarily in banking and finance, the switching costs are low, the main product being money and this makes it vulnerable to disintermediation, and the moat is susceptible to government regulation.

Moats depend less on managerial brilliance, which is how a company plays the hand it is dealt, and more on the cards the company is holding in the first place.

Detailed Business Explanation BBVA operates as a diversified financial services group with a strong presence in various geographical regions, offering a wide range of financial products and services.

Geographic Diversification: BBVA’s revenue is spread across several regions, including Spain, Mexico, Turkey, and South America. This geographic diversification provides stability by reducing dependence on any single economy. However, each region presents its own unique set of challenges and risks.
Spain: This region remains the largest contributor to BBVA’s earnings. It’s a mature market that provides a stable earnings base, but is susceptible to economic downturns.
Mexico: This market is a significant driver of growth for BBVA, with a large and expanding population and increasing banking penetration.
Turkey: Although having experienced economic instability, the region continues to be important. The volatility has affected the lira, with Turkey now in a hyperinflationary environment, creating challenges for pricing and margins.
South America: BBVA has operations across South American countries, which have delivered substantial growth. However, the region also carries risks like currency volatility and political uncertainty.
Core Businesses: The company is organised across these areas:
- Retail Banking: Offers core banking products such as accounts, lending, and mortgages.
- Corporate Banking: Provides banking services to large businesses and corporations.
- Investment Banking: Advises and assists companies on transactions and capital management.
- Asset Management: Offers various investment management services and products to clients.

BBVA is strategically positioned in emerging markets to capture potential growth while also retaining strongholds in developed economies, making it a relatively resilient global player.

Industry Trends

Increasing Digitalization: The financial industry is undergoing a digital transformation, with customers increasingly utilizing online and mobile banking channels. This trend requires financial companies to make large investments in technology, but it also provides opportunities to lower costs and expand their reach.
Shift in Consumer Preferences: Consumers increasingly demand personalized and easy-to-use financial products and services. Banks that can quickly adopt and offer products aligned with these changing preferences will achieve an edge.
Regulatory Environment: The regulatory environment for financial services is constantly evolving, which could pose challenges to margins and revenues, given the changes in regulations can create new costs or limit the ability to cross sell services to customers.
Competition from Fintechs: Fintech companies are increasingly challenging banks by offering innovative and often lower cost options to some customer segments. To compete effectively, banks are trying to build a better user experience.
Interest rate changes: The current rise in interest rates globally could negatively impact loan repayment ability, impacting banks’ income streams.

What makes BBVA different?

Geographic Diversification: As stated above, geographic diversification allows BBVA to diversify risk and find growth pockets in their various operational regions.
Globalized Operations: BBVA has a wide international footprint, which has brought a depth of knowledge for the bank to make expansion and operational decisions in various markets globally.
Commitment to digital transformation: BBVA is focused on digital banking, and aims to improve its infrastructure and customer experience across mobile and online channels.
Customer-Centric Approach: BBVA has an emphasis on customer service and personalized financial solutions, which increases customer loyalty and retention.
Sustainability Commitments: BBVA is focusing more and more on sustainability initiatives and ESG factors to attract investors and customers who care about these matters.

Financials in-depth The financial performance for BBVA is a mixed picture. Let’s break it down:

Profitability: BBVA’s profitability has been solid, with the bank achieving considerable growth in net profit for 2023, at €8,019m, a 26% increase year-on-year. The majority of this is attributed to the growth of revenue, but the expense base has also increased.
Net interest income (NII): NII for 2023 rose by 17.8% to €25.4 billion, and is the main source of income.
Net Fee and commission income: This has also increased, by 15.3% to €6.2b million.
Efficiency: The efficiency rate was a little worse at 40%, mainly due to costs associated with the implementation of new systems and the new inflationary pressures in all markets.
Return on Equity: BBVA’s return on equity has increased over the past few years, but this has been driven by the market, which is likely to mean that the company may struggle to maintain the same level of return if market conditions change. The ROE was at 15.6% for 2023, compared to 12.7% in the prior year.
Capitalization: BBVA continues to maintain a very good Common Equity Tier 1 (CET1) ratio. As of December 2023 it was 12.68%.
Non-Performing Loans: NPL ratio was stable at 3.4%, however, in some markets there is a noticeable increase in NPLs.
Assets: BBVA’s total assets are relatively stable over the past year, at just over 870 million, although there has been a trend towards growth for several years now.
Liabilities: The majority of the company’s debt has been created in the form of demand deposits. Given the risk profile of the business, this is preferable to having too much debt in bonds.

The company is increasing its customer base, and seeing an increase in revenues, as a result. The main issues the company is facing is the effect of inflation and its impact on future loan repayments. A well capitalized bank.

Recent Concerns and Problems

Turkey: Hyperinflation and currency volatility continue to be a challenge, which could impact the overall value and profitability.
Management Response: BBVA continues to work to hedge their risk exposures and ensure the protection of assets from currency changes.
Macroeconomic Volatility: The recent global economic conditions have been uncertain, with higher inflation and interest rates which may impact loan performance and credit risk, and have impacted growth across emerging markets.
- Management Response: BBVA has indicated they are carefully monitoring the macroeconomic conditions and will tailor strategies in response to changing conditions.
Rising Inflation: The recent increase in inflation has increased expenses and costs, therefore affecting the overall profitability of the company.
Management Response: BBVA is taking active measures to decrease expenditure and increase profitability, to counteract the effects of rising inflation.

Understandability: 3/5 BBVA is a large, global bank with a complex range of activities across different countries and sectors. While the basic financial services they provide are relatively simple to understand, some of the intricacies associated with them, including the many different geographical markets, makes it a more complex business to fully grasp. There is also the impact of the complex regulatory frameworks that are prevalent across multiple markets, this makes it somewhat difficult to fully understand how BBVA operates.

Balance Sheet Health: 4/5 BBVA’s balance sheet is in a relatively strong state: it has a good CET1 ratio of 12.68% and loan loss provisions have been increased. The company also has an established and varied funding base. Although there are concerns surrounding the exposure to Turkey, management remains focused on managing this exposure and has proven to be very adept at navigating such economic turmoil. However, it is still noteworthy that BBVA is heavily reliant on customer deposits, and a sharp decline in deposits could negatively impact its overall capitalization level.

The major concern in all aspects of BBVA is that the external environment could materially alter the company, such as any financial or economic shock. The company has demonstrated its ability to manage any challenges, but these are nonetheless risk factors that need to be considered.

Conclusion

In summary, BBVA is a financial institution with a narrow economic moat, primarily due to its established brand and operations in high market share segments. However, the bank is vulnerable to multiple aspects of economic and industry-related changes, and faces considerable competition. The bank is profitable and well capitalized, and while having a solid business model, its exposure to some volatile markets is a point to monitor.