LONDON - In the 16th century Europe successfully repelled the Ottoman Empire’s advance at the Siege of Vienna. Those defences have been latterly breached judging by the share price declines of European banks with substantial Turkish operations. On Friday shares in BBVA , UniCredit and BNP Paribas all fell by between 3 percent and 4 percent, underperforming the EURO STOXX Banks Index, thanks to fears of a spreading economic crisis.

The Turkish lira depreciated in value by nearly 6 percent against the euro on Friday, compounding a quarter percent decline since May. Against the dollar, it is already at record lows. The good news for the European banking sector is the scope for contagion is relatively low. Spanish banks have the highest exposure to Turkey, at nearly 5 percent of lenders’ total foreign claims, followed by Italian banks at 2 percent, according to the Bank for International Settlements.

The market’s reaction could be more discriminating. BNP owns a majority stake in Turkish retail bank TEB, but the latter contributes a fraction of pre-tax profit and Turkey accounts for about 2 percent of group assets. BBVA’s Garanti Bank holding means the state accounts for 11.5 percent of group earnings and around the same proportion of group assets. UniCredit said that its Yapi Kredi arm represented less than 2 percent of revenue.

Turkey’s long-running economic difficulties have not yet led to a spike in bad debts, which at 2.9 percent of lending in June remain modest. But impairments on the BBVA’s Turkish financial assets ballooned by a worrying two-thirds in the first half year-on-year. If they experienced Greek-style bad debts and had to write down their Turkish assets by, say, one tenth, it would potentially knock 2 percentage points off BBVA’s 11.4 percent common equity Tier 1 ratio.

A key distinguishing factor will be to what extent local operations were self-funded with locally sourced deposits, as opposed to loans from the parent company. The former reduces the impact of currency volatility and mitigates the group having to take potential future losses. In 2012 in Greece, foreign banks were hit particularly hard by the mismatch.

Both BNP and BBVA said their Turkish banks are self-funded. That kind of clarity is important for banks that don’t want to swallow further share price attacks.

CONTEXT NEWS

- Shares in three large European banks fell on August 10 as worries over a 10 percent plunge in the Turkish lira against the dollar weighed with those most exposed to the country.

- France’s BNP Paribas, Italy’s UniCredit and Spain’s BBVA shares fell by around 3 percent by 0928 GMT on August 10 after the Financial Times reported that the European Central Bank is concerned about their exposure to Turkey in light of the lira’s fall.

- The ECB’s Single Supervisory Mechanism, set up to monitor the activity of the region’s banks, has over the past couple of months begun to look more closely at European lenders’ links with Turkey, the FT added.

(Editing by George Hay, Bob Cervi and Karen Kwok)

© Reuters News 2018