Spanish banks, focused on Latin America

Santander and BBVA's accounts continue to be heavily weighed down by their Latin American business. The takeoff of profits for Spain's two largest banks will depend on the region's definitive recovery.

Three years ago, Spanish banks made their debut in Latin America. Language and cultural affinity led Santander and BBVA to prefer investing in financial institutions in the New World rather than in more mature geographic areas, such as Asia, or in regions with fewer competitive advantages, such as emerging Central Europe. BBVA focused on Argentina and Mexico, while Santander invested in Brazil.

The financial crisis of 2000 and the bursting of the stock market bubble led to a deterioration in financial results and a proliferation of provisions that reduced the profits of Spanish companies. Currently, despite a partial withdrawal of their presence in the region, major Spanish banks remain heavily dependent on the performance of the Latin American economy.

Mexico and its domestic business remain the key variables to watch for BBVA in the medium term. The bank has confirmed its 2003 profit target, 25% higher than last year, and the market perceives an improvement quarter after quarter.

However, the results for the BBVA America division are not so optimistic: -3,3% attributable profit, -16% net interest margin, and -5,2% operating margin. The factors behind this poor performance have been currency depreciation (primarily the Mexican peso) and the sharp drop in short-term interest rates, which reduces customer margins.

Regarding Banco Santander, expectations are better as it benefits from the improved prospects for recovery in the Brazilian economy. "The success of recent sales campaigns in Spain, along with cost containment and an improved situation in Brazil, could lead to outperforming the benchmark index for the region in the medium term, although it will still be subject to the index's performance," says Natalia Aguirre, head of analysis at Renta 4.

In the first nine months of the year, Banco Santander achieved a profit of €1.038 billion in Latin America, virtually the same amount as the previous year, having passed the turning point and improving its contribution quarter by quarter. "The most noteworthy aspect of the region is the increase in business volume and fees, as well as the contribution of market-related items, combined with cost reductions," Aguirre added.

Brazil contributes more than half of the profit of the entity chaired by Botín in the area, reaching up to 536 million euros, with a growth of 18,6% in local currency and 42,5% in dollars.

Lula's reforms have become evident and significant increases in activity are already being seen, with credit investment growing by 17%, despite the system's meager growth, accompanied by high customer margins - due to high interest rates - and without being harmed, at least for the moment, by the reductions that have taken place in the short-term reference rate (Selic).

Furthermore, delinquency rates in the country are improving and coverage is increasing. Bank sources have expressed optimism regarding the coming quarters, both due to the country's improved macroeconomic performance and the bank's management practices.