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Few bosses worry about European politics more than its bankers. In Italy and Spain new taxes have been levied as punishment for higher profits. The populist surge in France has redoubled concern. When Emmanuel Macron announced shock parliamentary elections in June, investors in French banks legged it. The final round of the election, held on July 7th, is likely to empower reckless spenders on the hard left or hard right. In an interview with Bloomberg in May, Mr Macron made a rare political pitch for a more integrated banking market, including cross-border deals. Now the sharp election-related fall in the price of France’s government debt has instead revived memories of the “doom loops” of the euro-zone crisis of the early 2010s, when worries about the solvency of sovereigns and of lenders fed off one another.
More volatile politics could make European banks even more parochial and less ambitious than they already are. One exception is Banco Bilbao Vizcaya Argentaria (BBVA), which cannot be accused of being either. The Spanish lender makes more than half its profit in Mexico. After Spain, its next largest market is Turkey, where the economy is so dire that BBVA uses “hyperinflation accounting” in its bookkeeping. And it is no shrinking violet at home. In May BBVA made a €12bn ($13bn) hostile offer to acquire Sabadell, a Spanish competitor it came close to buying in 2020.
Absorbing Sabadell would make BBVA about the tenth-largest bank in Europe by assets. That is hardly enough to earn it more than a cult following. But there are good reasons to study its fortunes, and not just because its return on equity of 17% makes it one of Europe’s most profitable lenders. BBVA also offers a window on America’s efforts to reroute supply chains away from China, in which Mexico plays a big role. And the pulse of European integration can be taken by examining the deal the bank is pursuing at home. BBVA is, in short, business’s political bellwether.
In what could be mistaken for a fictional warning about Spanish nuclear weapons, an advertisement printed in this newspaper during the 1980s shows more than a dozen arcs thrusting outwards from BBVA’s headquarters in Madrid. One lands in Mexico, denoting a solitary office in the country—it was not until after the “tequila crisis” a decade later that BBVA went all in. In December 1994 Mexico’s peso was devalued and its banking system collapsed. Looser restrictions on foreign ownership allowed outsiders to recapitalise lenders and in 2000 BBVA bought into Bancomer, now the country’s biggest bank.
“Mexico is a clear winner of the nearshoring trend, no matter what happens in the US election,” says Carlos Torres Vila, BBVA’s chairman. Or indeed what happened in the Mexican one a month ago, when Claudia Sheinbaum, a left-winger, was elected as president—an event that, to Mr Torres Vila, “confirms our bullish view”, referring to her promises of fiscal discipline. As China’s star rose, Brazil’s financial sector grew along with its commodity exports. Now BBVA hopes decoupling could do the same thing in Mexico. According to Jefferies, an investment bank, the stock of bank loans to the private sector in Mexico stands at a fifth of GDP, less than half the level in Brazil, leaving lots of room to grow. The spread between the interest BBVA pays on deposits and receives on loans in Mexico is three times larger than in Spain.
BBVA’s domestic dealmaking is similarly bold. Hostile takeovers among banks are vanishingly rare and not without theatre. An investment banker close to Sabadell’s defence strategy counters that the offer “ignores the reality” of soaring bank valuations. Mr Torres Vila says that his offer is a “knock-out” and dismisses the suggestion of improving it to tempt Sabadell’s board. Its shareholders were expected to approve the share issuance needed to buy Sabadell on July 5th, after we published this.
There are, of course, risks. As Chinese firms set up shop in Mexico, some American politicians question how much their country’s dependence on China has really been reduced. If Donald Trump returns to office next year, the self-styled “tariff man” could stunt investment in Mexico. Many are less sanguine than Mr Torres Vila about the spending plans of Mexico’s new president and her huge majority.
BBVA might find itself wrongfooted at home, too. Courting shareholders is the easy part of a gruelling assault course of approvals. The merger requires a nod from the European Central Bank and Spain’s market and competition authorities. It also requires the assent of the country’s government, which opposes the deal. That its own competition worries, seemingly not shared entirely by technocratic trustbusters, concern the banks’ operations in separatist Catalonia (where until 2017 Sabadell had its headquarters) suggests politics rather than antitrust may be at play.
Should BBVA fail to win government approval for a full merger, it could settle for owning Sabadell as a subsidiary; it would own the bank without being able to integrate the businesses completely and benefit from cost savings—at least until more amenable officials decide to give it the green light. Still, the fact that the merger may be derailed by messy domestic politics is testament to the reality that European banking—like business more broadly—is not a dispassionate and sensible affair overseen by Brussels alone.
Yellow-and-red-blooded capitalist
BBVA’s business is often described as an exercise in balancing fast growth abroad and a sturdy business at home. It looks to have made an analogous political bet—on an embrace of protectionism by America and a respect for markets in Europe. If BBVA continues to thrive in Mexico and manages to complete its conquest in Spain, it will reap the rewards—and may even encourage other businesses to follow suit. These are risky manoeuvres. But a bit of risk-taking is what Europe needs. ■
If you want to write directly to Schumpeter, email him at [email protected]
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