Elections in Mexico: new political coordinates for the subsidiary that contributes the most to BBVA

This Sunday Mexico celebrates the biggest elections in its history. The polls give a resounding victory to Claudia Sheinbaum from the Morena party, who will continue the policies of his mentor and current president Andrés Manuel López Obrador (AMLO). These elections will be monumental, with more than 20,000 positions at stake, including 628 seats in Congress, (128 senators and 500 federal deputies). Significant changes are expected in the political landscape of the country, which faces challenges such as the relocation of production to the United States and the review in 2026 of the free trade agreement (T-MEC) with its northern neighbors, the United States and Canada. In short, Sunday’s elections will leave a new political framework of which a certain continuity is expected and which BBVA will closely follow, now involved in the takeover bid launched by Sabadell and which obtains the bulk of its profits in Mexico. Any political surprise in Mexico could inject volatility into the value and have effects on the exchange equation, although today it is not a risk that experts manage.

“If Claudia Sheinbaum is successful in the presidential race, her administration’s continuation of AMLO’s policies is likely to have several positive implications for investors. “Her commitment to fiscal discipline and public debt stability could provide a stable economic environment,” she explains. This expert also highlights the slower pace of GDP growth in the country: “we expect GDP to slow to 2.2% in 2024, from 3.0% last year, despite the increase in public spending before the elections. elections,” says Luis Lopez Vivas, economist for Latin America at AXA IM.

BBVA México is the subsidiary that contributes the most to the Spanish banking group chaired by Carlos Torres, leader in this market with a 30% share in consumer loans and a 32% share in credit cards. Of the 2,200 million profits that the BBVA group achieved in the first quarter of this year, 1,441 million (56%) came from its North American subsidiary. And it is not a coincidence: in 2023 as a whole, 55% of the Spanish group’s results were achieved with its business in the Aztec country. The figures show the relevance of the business in this country compared to the 13% of the profit that the subsidiary of Banco Santander contributes in Mexico.

Furthermore, it is a very profitable business. BBVA in Mexico achieved an ROE (return on equity) last year of 27.5%, only surpassed by the local entity Banorte with 27.9%: the average ROE of the sector in the country was 18.9%. last year. The Mexican subsidiary of BBVA has had a meteoric evolution at the beginning of the year. Credit investment grew by 8.8% year-on-year, thanks mainly to the consumer, card and SME segments. Customer funds also rose sharply, 12.5%, driven by investment funds and in the income statement, recurring income stands out, thanks to the boost in activity. As a sign of the Spanish parent company’s interest in this market, it recently announced that investment in Mexico will reach 81,400 million pesos in 2024 (4,454 million euros), well above what was planned in the 2019-2024 Plan.

Rates, currencies and taxes

Looking ahead to the new presidential term, the two main questions for BBVA Mexico are the evolution of the Mexican peso against the euro and the possible implementation of a new banking tax, following in the footsteps of Brazil and Colombia. No major movements are expected in interest rates, which currently stand at 11%, after a 0.25 point cut last March in the intervention rate. These are high rates that benefit the banking business and whose evolution will be closely linked to what the United States does. According to Goldman Sachs estimates, the one point increase in rates improves BBVA México’s interest margin by 2.3%.

Regarding the Mexican peso, the US bank points out that a 10% depreciation in the currency generates a headwind of 9 basis points to the CET1 (solvency ratio) in the subsidiary, which stood at 12.67%. at the end of 2023. BBVA covers approximately 60% of the expected net profit in Mexico in 12 months, which at the capital level is equivalent to 3 basis points of CET1 per quarter.

Another fear that analysts already include in their reports is the creation of a new tax on banks in Mexico, an idea that the outgoing president already announced but did not finalize. Both applying a special tax or cutting current deductions are being considered.

“I think that the result of the elections could move BBVA’s price, especially if the market begins to take the issue of the bank tax for granted, however it is going to be implemented. Today, it is not possible to make a forecast of the future impact of the banking tax without knowing what measure they will choose to apply. But in any case, it will be negative in results because at the end of the day you will have a higher tax burden,” says Nuria Álvarez, Renta 4 analyst.

Marisa Mazo, an analyst at GVC Gaesco, considers that a new tax could affect BBVA’s takeover bid for Sabadell, since in this operation the exchange of shares has been established and if BBVA earns less, its price would fall and the exchange would be more harmful for the current shareholders of Sabadell. Mazo has made a calculation assimilating it with the current extraordinary tax of the Spanish Government for banking of 4.8% on commissions plus interest margin. “It would have had an impact of 673 million euros on the profits of BBVA México in 2023, which means having earned 12% less in the subsidiary and 8% less for the entire banking group chaired by Carlos Torres,” she concludes. . At the moment, Sheinbaum has not specified anything about a new tax in the campaign. “Before generating a tax reform, or increasing taxes, we would have to talk about it with businessmen so that there are no big problems,” she has limited herself to pointing out.

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