Spanish banks looked to Latin America to bolster their profits during the domestic financial crisis, but this could change as the region faces troubles of its own.  

Spanish banks have established a firm foothold in Latin America, hoping that the region’s dynamic growth would balance out problems in their domestic market. The decision paid off handsomely, as Latam business kept booming while profits in Spain faltered.

However, while Spain’s economy is finally on the up, challenges are now mounting in Latin American. Last year, profits from the Latin American operations of Spain’s two largest banks – BBVA and Santander – showed significant drops (see chart) due to exposure to ailing local markets.

Spanish-banks-share-in-New-World-ails

Santander has been particularly affected by the situation in Brazil, where its largest and most lucrative unit is located. Originally one of Santander’s main revenue drivers, LatAm profits at the bank started to decline in 2010. 

Last year, Santander’s Brazilian operation posted its worst results since 2008 and although the trend could be reversed this year – three quarters into 2015 the bank has earned a 22.1% higher profit than during the same period in 2014 – these efforts could be hampered by the economic situation in Brazil and declining value of the local currency, as the country sunk into a recession midway through the year.                                                        

BBVA was less exposed to the Latam downturn, and its profits in the region grew at a steady pace from 2008 until last year. The recent dip in profits can be attributed to a substantial exposure to Venezuela, which has been rocked by political upheaval and dismal economic performance. The country has now introduced a complex system of capital controls in efforts to rein in inflation. At the end of last year, two official exchange rates existed, and if the lower rate of the two (offering 12 bolivars per dollar instead of 6.28) is applied to the results, there is a precipitous drop in BBVA’s earnings.

Moreover, when reporting first-quarter results for Venezuela in April 2015, the BBVA decided to shift to a third exchange rate system called Simadi, which was introduced in February this year. Under this regime, the exchange rate dropped precipitously to 183 bolivars per dollar, making the bank’s contribution to overall group earnings negligible. BBVA’s revenue from Venezuela will be stunted as long as this situation continues.

Fortunately for the bank, its main operation in the region is doing fine. The unit in Mexico is the largest in Latin America by a long shot – with $114bn in total assets, it is more than twice the size of the firm’s Venezuelan bank – and it is also the most profitable.

The Mexican unit of BBVA has managed to withstand the ups and downs of the country's economy in recent years and is now poised to benefit from the expected upturn in the local market. Growth in gross domestic product is expected to accelerate this year and the next, leaving ample room for growth in profits.

            

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter