Santander, BBVA Face Profit Drain on Emerging Currencies

Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain’s biggest banks, face a fresh risk to earnings as the slump in emerging market currencies threatens to slow growth from Brazil to Turkey.

Santander relies on consumer banking in Latin America for more than a third of profit, while BBVA has made Turkey, whose lira is the second-worst performer against the euro over the last three months, a centerpiece of growth plans. Santander reports fourth-quarter results on Jan. 30 and BBVA a day later.

Emerging market currencies tumbled in recent months as the Federal Reserve prepared to reduce the monetary stimulus that fueled investment. Deadly protests from Ukraine to Thailand worsened the exodus, while Argentina’s devaluation of its peso last week dented confidence in Latin America. For the banks, weakening currencies erode the value of earnings abroad when they are converted into euros. They also pose a challenge because Santander is counting on profit from markets such as Brazil to pad capital levels that are thinner than those of some European peers.

“Even if the currency moves by themselves don’t necessarily have a major effect, it’s the second-order effects that can be very significant in terms of how do the authorities in these countries react,” said Nick Anderson, an analyst at Berenberg Bank in London. “It all feeds back into the capital question, because of these potential second-round effects.”

Profit Estimates

The Argentine peso has plunged 26 percent against the euro in the past three months, while the Brazilian real has weakened 9 percent and the Chilean peso 6.9 percent. Currencies from India to South Korea rebounded today amid a rally in emerging markets after India unexpectedly raised interest rates.

Santander, based in the port city of the same name, may say fourth-quarter profit rose to 1.27 billion euros ($1.74 billion) from 423 million euros a year earlier, when the bank took charges to cover real estate losses, according to the average estimate in a Bloomberg survey of 10 analysts. Latin America may contribute 3.34 billion euros to full-year profit of 4.9 billion euros, with Brazil providing 1.6 billion euros, Banco BPI SA estimated.

BBVA may post a fourth-quarter net loss of 683 million euros, according to the average estimate of nine analysts surveyed by Bloomberg. The Bilbao, Spain-based lender said in October it would take a 2.3 billion-euro charge for reducing its stake in China Citic Bank Corp. to free up capital. BBVA may report a 354 million-euro loss at its Spain unit and a 9 percent slump in earnings from Mexico, the biggest contributor to earnings, according to BPI.

Capital ‘Laggard’

BBVA expects economic growth in its key markets to be better this year than in 2013, spokesman Paul Tobin said by phone today. A spokeswoman for Santander declined to comment when contacted by Bloomberg News.

Santander declined 2.4 percent in Madrid trading over the past 12 months, while BBVA climbed 13 percent. That compares with the 11 percent gain in the 44-company Bloomberg Europe Banks and Financial Services Index in the period.

Spain’s largest banks relied on earnings from developing economies, mostly in Latin America, to soften the impact of the Spanish property crash and help them build capital. In Brazil, which contributes a quarter of Santander’s profit, the central bank has raised its benchmark interest rate to 10.5 percent from 7.25 percent in April to quell inflation, slowing growth.

Santander is a “capital laggard,” Rohith Chandra-Rajan, an analyst at Barclays Plc, said in a Jan. 13 report.

The lender’s Tier 1 ratio under fully-applied Basel III capital standards is set to be the third-weakest this year among 27 European banks, at 9.2 percent, Barclays estimates. Santander has a potential capital deficit of 4.2 billion euros at the group level and as much as 12 billion euros at its Spanish business, Chandra-Rajan said in his report.

Emerging Markets

Santander has been boosting capital levels by selling off bits of its business, including a 4 percent stake in its U.S. auto-lending unit as part of an initial public offering that yielded a 740 million-euro gain for the bank. The lender sold 85 percent of its Spanish real estate platform Altamira to Apollo Global Management LLC this month to raise 550 million euros.

Emerging markets from Brazil to Chile and Mexico accounted for about a fifth of Santander’s loan book in September, according to research by Nomura Holdings Inc. Brazil’s economy may grow 2.1 percent this year, slowing from 2.3 percent in 2013 and 7.6 percent in 2010, according to the median estimate in a Bloomberg survey of 32 analysts.

“Santander is counting on its ability to generate profit from Brazil to build up capital, so there is a real issue with currency weakness,” said Daragh Quinn, a Madrid-based banking analyst at Nomura, in a phone interview.

Turkish Stake

Emerging markets accounted for 27 percent of BBVA’s loans in September, according to Nomura. The bank relies on Mexico and South America for almost 60 percent of operating income. It also controls 25 percent of Turkish lender Turkiye Garanti Bankasi AS, the biggest bank by market value in a country whose currency weakened about 4.3 percent against the euro this year. BBVA can take full control of Garanti starting in March 2016 under its 2010 investment agreement.

Argentina, which has the worst-performing currency this year after an 18 percent slide, isn’t a key market for Santander or BBVA. The country contributed 3.4 percent to Santander’s nine-month net operating income and 4.2 percent to BBVA’s net profit over the same period, according to company reports.

The broader foreign exchange turmoil is a threat for both banks as a prelude to tougher economic conditions in markets that both rely on for growth, said Nomura’s Quinn. “The currency risk is a significant issue -- it’s going to be on everyone’s lips.”

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