Exchange rate hedging, a tool to stabilize results and capital when currencies fluctuate
Due to its international presence, BBVA has an exchange rate risk hedging policy which is intended to preserve the Group’s capital ratios and provide stability to its results.
BBVA Group’s hedging policy protects capital and profits against fluctuations in the local currencies of markets in which BBVA is present. BBVA hedges around 70 percent of its excess CET1 capital (the part that is not naturally covered by the ratio itself) and an average between 30 percent and 50 percent of the expected results of its subsidiaries in the next twelve months.
In regards to Turkey, where BBVA is a long-term investor and has a presence through a 49.85 percent stake in Garanti BBVA, the Group has coverage of around 60 percent of the expected results of Garanti BBVA for 2021. With the current level of coverage, the sensitivity of BBVA’s fully loaded CET1 capital ratio to a 10 percent depreciation of the Turkish lira is very limited, with only -2 basis points.
Furthermore, BBVA has proven experience in managing universal banking in emerging markets through a decentralized model. In this sense, it follows an MPE (Multiple Point of Entry) strategy with self-sufficient subsidiaries, responsible for managing their own liquidity and capital, so that there is no transfer of funds or cross-financing from the parent company to the subsidiaries, or from each other’s affiliates. This decentralization acts as a natural firewall, avoiding the risk of contagion between subsidiaries. Similarly, as there is no cross-financing, the MPE model limits BBVA’s risk to the book value of the investment in its subsidiaries, which, in the specific case of Turkey, amounted to €3.64 billion¹ at the end of 2020 (around 9 percent of the Group’s tangible book value).
¹Discounting the value of goodwill as of December 2020 (254 million euros).
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