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Short-Term Gain, Long-Term Pain?

27 July 2018 by jbchevrel

Today we had all the ingredients to see BBVA 5y CDS wider: • We had BTPs widening vs Bunds (+4bp in 10s), after the local press suggested that Grillo was relaunching a Euro-exit movement in Italy, and ahead of Monday's supply (5s and 10s). • We had most peripheral banks' CDS wider on the back of that (IT banks +3/4bp SANTAN +2bp). • We had TURKEY wider (+4bp), still close to the post-GFC widest level (315bp vs 340bp). For reference, BBVA is the biggest shareholder in Turkiye Garanti Bankasi (c50% stake). But BBVA 5y CDS actually closed tighter, after its Q2 earnings came at the very top of the expectation spectrum (net €1.3B). The beat was driven by higher NII/fees and lower LLPs. Despite today’s outperformance, the Turkish risk is still looming. In Q2, the Turkish unit’s NPL ratio is up 3.2% QoQA and its CoR is up c1% QoQA. Depending on future developments in Erdogan’s Turkey, that trend may well worsen the picture for Spain's #2 bank.