BBVA To Buy 24.9% Of Garanti, Launch Capital Hike

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Banco Bilbao Vizcaya Argentaria SA (BBVA.MC) Tuesday said it has agreed to buy a 24.9% stake in Turkey's Garanti Bankasi AS, signaling a commitment to keep up expansion despite the funding concerns surrounding Spanish banks. BBVA, Spain's second-largest bank by market value, said it will launch a EUR5 billion capital increase to finance the deal. It will buy the stake from Dogus Holding, a large Turkish conglomerate with interests stretching from energy to car making, and General Electric Co. (GE), paying $5.838 billion altogether.

It is BBVA's first significant purchase since 2007, although the bank also bought a small, Austin, Texas-based bank last year to beef up its growing U.S. operations. For Turkey, the deal is evidence of growing foreign interest in a market that maintains solid economic growth and may be helped by increasingly close ties to the European Union. Turkish banking watchdog BBDK welcomed the deal, while Dogus Chief Executive Ferit Sahenk said the synergies between the groups would help Garanti develop into a "global player" and pave the way for more capital to flow into Turkey, according to CNBC-e Turkish television.

Garanti Bank, Turkey's second-largest bank by asset value with a EUR19 billion market value and 9.5 million clients in Turkey and Romania, is considered one of best-run lenders in Turkey's banking sector. Turkey's tightly regulated banks have shown remarkable resilience during the financial crisis, with many posting record profit and lending rates in the second quarter. Banking penetration in the country is low compared with more mature European economies, and the economy is on solid footing at a time when Europe, and particularly Spain, is struggling to come out of a deep economic downturn.

BBVA shares tumbled of the news, extending a recent losing streak as analysts have questioned the rationale of a such a move at a time when BBVA's margins are under pressure amid heated competition for scarce deposits in Spain. At 1008 GMT, the stock was down 2.2% at EUR8.91, as Spain's IBEX-35 worst performer, following a 3.6% drop Monday. Javier Bernat, an analyst with Caja Madrid, said BBVA shares should remain under some selling pressure short-term, as the bank is paying a high 10.8 price-to-2010 earnings ratio for each Garanti share, well above BBVA's current 7.5 ratio. "The deal is dilutive in terms of earnings per share and value... In the short term, it's going to have a negative impact," Bernat said. "Strategically it makes sense, or it may make sense."

Caja Madrid has a buy rating on BBVA and is currently reviewing its price target.

The planned capital increase, which amounts to over 15% of BBVA's EUR33 billion market capitalization, is also a reason for concern, analysts say. BBVA said it will issue shares at EUR6.75 each, well below their current market value. The new shares will start trading Dec. 1.

BBVA is the latest of several European banks to conduct rights issues in recent weeks, for various reasons, including the U.K's Standard Chartered PLC (STAN.LN), Germany's Deutsche Bank AG (DB), the National Bank of Greece (ETE.AT) and Italy's Banco Populare (BP.MI). Allied Irish Banks PLC (AIB) plans to raise EUR5.4 billion later in this month.

Meanwhile, shares in Garanti--which is expected to post third-quarter results later Tuesday--were a tad higher in early trade, roughly in line with Istanbul's benchmark IMKB stock index.

The deal involves a shareholders' pact with Dogus, which will remain Garanti's top shareholder, with the same stake as BBVA. It also includes a buy option on 1% of Garanti that may be executed by BBVA starting from five years after the current deal is completed or whenever Dogus sells Garanti shares.

Some economists have cautioned that although Turkish banks' lending levels have been accelerating amid the country's gathering economic recovery, lenders are also facing a squeeze in net interest incomes because the central bank has stopped reducing interest rates, meaning banks must lower their own rates to win business.

But Turkey analysts welcomed the deal as a sign that foreign firms were prepared to commit to longer-term investment in the Turkish economy.

"No question, today's BBVA-Dogus deal for Garanti is a very positive mid-term message for Turkey's foreign direct investment picture, and thus a supportive for the lira," said Simon Quijano-Evans, emerging markets strategist at CA Chevreaux in Vienna.

Company website: http://www.bbva.com

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