Spanish Bank BBVA's China Strategy

A year after the collapse of Lehman Brothers, many banks and financial institutions around the world are still struggling. Banks in Spain, though, behaved conservatively during the boom and are now in good shape to continue their expansion through acquisitions and joint ventures. Spain's big banks, typically most aggressive in Latin America, increasingly are looking to expand in Asia. For good reason: China is on pace to grow over 8% this year, and many other Asian countries recently have been enjoying economic revivals. Moreover, many Spanish companies, including fast-fashion retailer Zara's parent, Inditex, are looking to Asia as their next market for growth. On Sept. 6, Telefónica, Spain's largest telecommunications operator, confirmed that it will increase its stake in telecom operator China Unicom from 5.38% to 8.06%.

The biggest Spanish bank in Asia is Banco Bilbao Vizcaya Argentaria (BBVA), Spain's second-largest by market value after Banco Santander. BBVA opened its first representative office in 1977 and in 2005 decided to focus on China as one of its markets for growth. Today, BBVA is the biggest Spanish investor in China, where it owns 10% of China Citic Bank (China), with a call option for two years to increase its stake to 15%. It also has just under 30% of Citic's International Financial Holdings (Hong Kong). Overall, the bank has invested $3 billion in China and Hong Kong within Citic Group, China's sixth-largest bank. CITIC has grown its network size by 26% in two years, wrote Sarah Wu and Nick Lord, analysts at Macquarie Equities Research, in a research note on Aug. 31.

In May, BBVA and its Chinese counterpart signed financing agreements on car loans and in private banking. BBVA will own 35% of a joint venture to finance the acquisition of cars in China, a market that grows at an annual rate of over 10% and where 2.7 million cars were sold during the first three months of 2009. BBVA will own 20% of a private-banking joint venture with China Citic Bank.

Thanks to such deals, BBVA is now the second-biggest European bank in Asia after HSBC. Apart from its participation and agreements with Citic, BBVA also develops its wholesale business, which brings the total volume in Asia to more than $6 billion. Since 2005 the bank has multiplied its activity by three times and its earnings by eight times. "Our strategy is not only for a bigger financial investment but for bigger growth," said Manuel Galatas, managing director of BBVA in Asia, in an interview at his office in Hong Kong. "Asia is a very important region for BBVA."

Expanding in the U.S., tooBesides China, the Asia-Pacific region offers numerous opportunities for BBVA that range from the financing of projects in Australia to the possibilities of India or serving clients from Latin America with a presence in Asia. The banks sees "great possibilities for growth" in much of the region, writes Ulla Karppinen, a spokeswoman for the bank, in an e-mail. Eventually, "the main goal of BBVA in Asia is to become its third source of growth, with Spain and America," writes Karppinen.

The bank is also expanding rapidly in the U.S. On Aug. 20, BBVA won a U.S. government auction for Texas-based Guaranty Financial Group, and the Spanish giant, led by Francisco González, has made it clear that BBVA is interested in taking over other shaky American banks. BBVA's profit in 2008 was $8 billion. The company doesn't provide any guidance or estimate for 2009's bottom line, but the consensus estimate of financial analysts is $7.1 billion, an 11% drop.

In the last three years, BBVA has grown from 50 employees to 170, spread around its three branches—in Hong Kong, Tokyo, and Singapore, plus six offices in the most relevant countries in Asia. Still, the bank is focused on the Chinese market because of its importance, long-term perspective, and difficulty. "Once we know better the Chinese market, the possibilities of getting into other significant markets in Asia are stronger than before," says Galatas. "We have no rush in doing it, but I would expect that in the coming years our presence in Asia will be much more significant."

Still, the bank's presence in Asia remains tiny compared with its reach in other markets. "Even though we positively value BBVA's efforts in increasing its presence in a market with great potential for growth…we still think the impact on the current value of the Spanish bank is still irrelevant," Irma Garrido, an analyst at financial-services firm Ahorro Corporación Financiera, wrote in a June 11 research note. BBVA doesn't reveal what percentage of its profit comes from Asia.

Bank of Spain's conservative policies bestow strengthEven though Spain's GDP is estimated to plunge around 4% in 2009, and the country suffers from an unemployment rate of 18.5%—the highest in the EU—and a collapsing housing market, its financial system remains sturdy, and its banks have managed to survive and even strengthen during one of the worst financial and economic downturns. This is due in part to the conservative policies of the Bank of Spain, which force national banks to boost their provisions during prosperous times and also stops them from taking on too much risk in such products as mortgage securities or any other derivatives. Spanish banks focus heavily on the retail market rather than the riskier investment banking. So far, BBVA is the only big European bank that has taken no capital injections or government support. In July, BBVA reported a 35% profit increase during the second quarter compared with a year ago. Spain, Mexico, and Portugal represented slightly over 70% of the group total profits during the first half of 2009. According to Galatas, Asia represents "only 2% to 3% of [BBVA's] total profits."

Walking through the offices of the bank's Asian headquarters on the 43rd floor of the impressive Two International Finance Center provides a snapshot of how young and intense the working environment is. Despite this lively and optimistic environment, BBVA's Galatas remains cautious and points out that the presence of the bank in the region is "a long-term strategy that may take a few years to pay off." He recalls how it took the bank about 10 years to succeed in Latin America, "and the Chinese market is even more complicated due to regulatory and cultural barriers. We need to understand how Chinese financial institutions work in terms of internal organization and its functioning with the government."

Other major Spanish banks are far behind BBVA in Asia. Peter Greiff, a spokesman for Banco Santander, says the Asian operations of Spain's largest bank focus on corporate banking in order to satisfy its clients, especially from Latin America, that need financing for commerce or investments. But "Santander's strategy in Asia is not very defined," says Nuria Álvarez, an analyst at financial-services firm Renta 4 in Madrid. "It has not put in as much effort as BBVA, and it has acknowledged that the Asian market is too difficult and has more barriers to entry than those in the U.S., Latin America, or Europe." But Álvarez adds that the current dominance of BBVA in Asia "doesn't provide an edge vs. Santander in terms of earnings results."

Looking into the future, analysts expect more action in Asia from BBVA to expand its lead over its Spanish rivals. "We could expect BBVA to take some stakes in companies where it's already invested, such as Citic, as early as next year," adds Renta 4's Álvarez. In Asia the opportunities for growth "are infinite in terms of countries and markets," says Galatas. "We are hoping to expand our usual business in global markets, corporate finance, and trade finance to improve our trade position between Asia and Latin America, which is getting very important."

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