Third-quarter beat dominated by BBVA’s higher provision and cost

Spanish BBVA (BBVA.MC), which has higher loan-loss provisions than expected, and a rise of costs in emerging markets overshadowed its third-quarter earnings that were lower than expected, sending shares down on Friday.

Mexico was the country’s main market and Mexico’s second-largest lender posted a 31% increase in quarterly net profit to 1.84 Billion Euros ($1.83 Billion), which is above the 1.55 billion analysts’ forecasts.

The loan-loss provisions increased 51% year-on-year to 940 million euros. This comes at a time when lenders around the world are putting aside more cash in case of a possible deterioration in the macroeconomic environment. However, this figure was lower than expected at 892 million.

BBVA’s cost-of-risk, which measures the cost to manage credit risks and possible losses for the bank at all levels, increased to 86 basis points, from 81 at June’s end, but was still below the 100 bp guide for the year.

After being the best Spanish blue-chip index Ibex 35 (.IBEX), the bank’s shares fell 2.7% in morning trading. The stock had experienced a 26% increase in the past three months.

“Declines of shares are more connected to doubts about the future business evolution, and the implications yesterday’s decision to the ECB cut a key subvention to banks,” Nuria Alvarez, an analyst at Madrid-based brokerage Renta 4 said.

Santander (SAN.MC), its main Spanish competitor, was the lender that raised provisions to protect against economic deterioration. Other European lenders also warned about growing risks.

Net interest income (NII) or earnings on loans with fewer deposit costs rose by 40% to 5.26 billion euros, exceeding the forecast of 4.83 billion.

Inflation effects, especially in emerging markets, caused a 20% increase in the cost of constant currencies at the group level by around 20%.

BBVA, like Santander, has been expanding in emerging markets as it struggles to increase income in mature markets. The quarter’s net profit in Mexico, which accounted for slightly more than 60%, jumped 68% while the NII grew 48%.

Turkey is the first country where BBVA implemented hyperinflation accounting. Net profit rose 38%, NII increased 32% and business trends were supportive of positive currency depreciation.

Spain’s NII rose 6.8%, while net profit grew 8.4%.

Spanish rival Caixabank CABK.MC saw lending income rise 6.2% in the third quarter but fell 0.4% in the first nine months of the year. Caixabank shares fell by around 4.5%.

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