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Mandarin lessons

17 October 2013 By Fiona Maharg-Bravo

BBVA is learning the Chinese art of saving face. The Spanish lender has attributed its sale of a 5 percent stake in China’s CITIC Bank to new Basel capital rules. Yet while the deal will add 2.4 billion euros to BBVA’s capital, it hardly sugarcoats a 2.3 billion euro writedown on the value of its stake. Basel may have provided a graceful way to reduce an underwhelming investment.

Investors had long expected BBVA to sell down its stake in CITIC Bank. Forthcoming bank capital rules heavily penalise lenders who hold stakes in other financial institutions. The boost to core Tier 1 capital is equivalent to 72 basis points, which will come in useful at a time when Spanish banks face a Europe-wide asset quality review and ever mounting non-performing loans at home. BBVA says it will be “comfortably above” a 9 percent Basel III core capital by the end of 2013.

The snag is that by taking its shareholding below 10 percent, BBVA must start marking it to market. It has written down its stake by about half, though the cash loss on what it put in is smaller. BBVA will now only be able to book dividends from CITIC Bank, not its share of the lender’s earnings, diluting the Spanish bank’s own earnings per share by 14 percent next year, according to estimates by N+1. That could put pressure on BBVA’s dividend.

Being less exposed to CITIC Bank is no loss. The Chinese bank trades at 0.6 times next year’s book value, according to Eikon estimates, the lowest of its peers. It will also need to raise capital, according to Bernstein Research. With luck, BBVA might be able to play the Basel card again to avoid putting in more money.

BBVA says it has revised its strategic agreement with CITIC Bank on a “non-exclusive” basis, potentially allowing the Spanish bank to open a branch of its own in China. It hasn’t given up on China. But it’s hard to avoid the conclusion that the CITIC Bank foray has been nothing short of a very expensive way to plant a Spanish flag in the Middle Kingdom.


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