BBVA has high exposure to lending in Mexico, especially in consumer lending which has been deteriorating lately due to Covid-19. We have been asked about the potential impact to our portfolios given the worsening outlook for consumer loans in Mexico.
BBVA has significant exposure to Mexico (12% of the group’s loans), and the situation there is challenging. However, we think it is important to take into account 1) the group’s diversification and long-term track record, where the group has not made a loss (even during the global financial crisis and Eurozone crisis) and 2) the Mexican entity is highly profitable (around 900 bps margin) and therefore has the capacity to absorb potentially higher credit losses.
With the group’s 304 bps buffer to MDA (EUR 11 billion) as well as its significant earnings buffer (EUR 13 billion pre-provision profits per annum) the group has significant capacity to absorb potential higher credit losses. Year-to-date, the group has set aside EUR 4.1 billion for loan losses, due to very harsh macro assumptions taken (Mexican GDP drop of 9% to 12% in 2020, Eurozone GDP drop of 7% to 11%).
For BBVA, we see Covid-19 as an earnings story and not a balance sheet story as higher loan loss provisions will be absorbed by earnings, while excess capital has increased due to regulatory easing. We therefore remain very well protected and are capturing spreads of around 700bps on BBVA’s AT1 instruments.