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Why Banco Bilbao Vizcaya Argentaria SA (BME:BBVA) May Be Riskier Than You Think

With a €37.12b market capitalisation, Banco Bilbao Vizcaya Argentaria SA (BME:BBVA) falls in the large, commercial bank category. A common risk large financial institutions face is credit risk, measured by the level of bad debt it writes off. During the Global Financial Crisis, large financial institutions with commercial banking arms lost billions of dollars in equity due to their lending portfolios’ exposure to the turbulent credit market. Investors lost confidence in what were once considered safe and stable stocks. Now we will analyse financial metrics focused on bad debt and liabilities in order to gain insights into Banco Bilbao Vizcaya Argentaria’s lending practices and better understand its operational risks.

View our latest analysis for Banco Bilbao Vizcaya Argentaria

BME:BBVA Historical Debt September 26th 18
BME:BBVA Historical Debt September 26th 18

What Is An Appropriate Level Of Risk?

If Banco Bilbao Vizcaya Argentaria’s total loans are made up of more than 3% of bad debt, it may be engaging in risky lending practices above the judicious level. Loans that are “bad” cannot be recovered by the bank and are written off as expenses which comes out directly from its profit. Bad debt makes up 4.57% of the bank’s total assets which is above the appropriate level of 3%. Given that most banks are generally well-below this threshold, Banco Bilbao Vizcaya Argentaria faces a much higher level of risk and exhibits below-average bad debt management.

Does Banco Bilbao Vizcaya Argentaria Understand Its Own Risks?

Banco Bilbao Vizcaya Argentaria’s ability to forecast and provision for its bad loans relatively accurately indicates it has a good understanding of the level of risk it is taking on. If it writes off more than 100% of the bad debt it provisioned for, then it has poorly anticipated the factors that may have contributed to a higher bad loan level which begs the question – does Banco Bilbao Vizcaya Argentaria understand its own risk?. Banco Bilbao Vizcaya Argentaria’s low bad loan to bad debt ratio of 72.44% means the bank has under-provisioned by -27.56%, indicating either an unexpected one-off occurence with defaults or poor bad debt provisioning.

How Big Is Banco Bilbao Vizcaya Argentaria’s Safety Net?

Handing Money Transparent
Handing Money Transparent

Banco Bilbao Vizcaya Argentaria makes money by lending out its various forms of borrowings. Deposits from customers tend to bear the lowest risk given the relatively stable amount available and interest rate. As a rule, a bank is considered less risky if it holds a higher level of deposits. Since Banco Bilbao Vizcaya Argentaria’s total deposit to total liabilities is within the sensible margin at 66.2% compared to other banks’ level of 50%, it shows a prudent level of the bank’s safer form of borrowing and an appropriate level of risk.

Next Steps:

Even though Banco Bilbao Vizcaya Argentaria’s level of deposits is sensible relative to its liabilities, it carries risk on the bad debt front by carrying a high level of the risky asset as well as exhibiting poor provisioning. Moving forward, this may mean its profits could be lower than expected. This possibility of an undesirable impact on cash flow lowers our conviction in Banco Bilbao Vizcaya Argentaria as an investment. Today, we’ve only explored one aspect of Banco Bilbao Vizcaya Argentaria. However, as a potential stock investment, there are many more fundamentals you need to consider. There are three key factors you should further research:

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  1. Future Outlook: What are well-informed industry analysts predicting for BBVA’s future growth? Take a look at our free research report of analyst consensus for BBVA’s outlook.

  2. Valuation: What is BBVA worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether BBVA is currently mispriced by the market.

  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.