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Western EuropeApril 4 2004

Back on track

Spanish banks have had an uphill struggle in Latin America but now the continent is delivering returns at the same time as the domestic market remains buoyant. Jules Stewart reports.Last month’s terrorist attacks in Madrid may have raised a question mark over Spain’s political agenda, but for the banks it is business as usual, only more so. The outlook for 2004 is for continued growth inoperating profits.
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“A healthier economic environment in 2004 will foster dynamic fee growth in Spain and Latin America, mainly related to fees from mutual and pension funds,” says Jesús Martínez, director at Standard & Poor’s in Madrid.

“At the same time, tight cost management will remain a key driver of profitability for Spanish banks. They are likely to achieve efficiency gains in 2004, driven by modest cost growth, thanks to staff cuts in previous years and the development of tight cost management cultures.”

Santander Central Hispano (SCH), the eurozone’s second biggest bank by market capitalisation after Deutsche Bank, and Banco Bilbao Vizcaya Argentaria (BBVA), which ranks in the top five, are the benchmark institutions dominating the domestic retail market.

Their universal banking model, with only minimal exposure to capital markets volatility, leaves the top players well placed to benefit from economic recovery in domestic retail banking and Latin America, the two key areas of growth.

“The 2004 operating outlook remains excellent,” says banking analyst Nick Anderson at Lehman Brothers, who is forecasting double-digit growth in domestic earnings against an attractive outlook for risk.

The Spanish banks’ gamble on Latin America, where SCH and BBVA have invested some $26bn over the past decade, looks set to return to good levels of profitability after a year of economic crisis in some key markets and high currency volatility. As a result, both banks reported a sharp drop in profits in euros, but gains in terms of local currencies.

BCH, which has built up a $16bn Latin American franchise, saw its profits from the region tumble 4.65% last year in euros, but gain 28% in local currency terms. BBVA reported similar results, nevertheless the bank spent more than e3bn euros last year to acquire the shares it did not already own in Mexico’s Bancomer, which analysts said was a testimonial to the Spanish bank’s confidence in the region.

Latin American growth

BBVA’s chairman Francisco González remains confident that despite a history of economic and political turbulence, Latin America is this year on track to deliver good value. “Growth in Latin America will in 2004 be close to the region’s potential, hovering between 3.5% and 4.0%,” he told a group of investors in Latibex, the Madrid stock exchange’s Latin American index.

“Latin America is in a good position to exploit the international economic recovery and attract more capital. Santander’s chairman Emilio Botín, whose main regional profit centre is Brazil, with other operations in Chile, and Argentina, reaffirmed his commitment to Latin America when presenting SCH’s 2003 results in January.

“Latin America is part of Santander’s DNA,” he said. “Without it we would not be what we are today. That is why we have only two options in the region: to grow or to grow.”

Best yet to come

Mr Botín expressed his confidence that the worst was over in Latin America, and that “the best is yet to come”. Brazil accounts for about half of Santander’s total Latin American earnings, while BBVA derives some 60% of its regional income from Mexico.

JPMorgan analyst Carla Atunes da Silva also believes that 2003 was the year of stabilisation in Latin America, but that credit growth opportunities have not yet delivered their full potential. “We have increased our estimates in Latin America by 2% in 2004 and 10% in 2005, which should translate into higher earnings multiples, particularly into 2005,” she says.

“Despite being impacted by the weakness in currency, Latin American earnings have started to show timid signs of the times to come.”

On the domestic front, SCH and BBVA can look forward to a year of stability in terms of consolidation, after two big shake-ups in 2003 that saw the UK’s Barclays broaden its Spanish franchise through the acquisition of Banco Zaragozano, and the Banco Sabadell takeover of fellow medium-size player Banco Atlántico.

“We do not expect to see any further consolidation in the Spanish banking sector until the ownership of the savings banks changes,” says Lehman’s Mr Anderson. “This remains highly unlikely for the foreseeable future.”

Spain’s powerful savings banks, or cajas, account for about 50% of the financial system and the two biggest, La Caixa and Caja Madrid, rank third and fourth after the top two commercial institutions.

The outgoing centre-right government of José María Aznar introduced legislation allowing the cajas to issues non-voting shares, called cuota participativas, which some interpreted as a first step towards de-mutualisation.

However, with the surprise victory of the PSOE (Spanish Socialist Workers’ Party) in last month’s general election, any move to privatise the cajas, had one been contemplated, has been taken off the agenda, in line with the PSOE’s electoral programme.

The socialists’ failure to gain an absolute majority means they will have to rely on regional parties for legislative support. The cajas’ strength lies mainly in the regions, The cajas’ boards are made up of local councillors of the party in power in each region.

These politicians sometimes use the cajas as a source of soft loans to local enterprises. The cajas are protected by their mutual status, although this does not prevent them from taking over banks, which they have done in the past.

In the current environment there is little likelihood of the local parties releasing their grip on the cajas, although the banks have learnt to live without a level playing field and hold their own against competition from the cajas.

Cross-border mergers

Looking ahead, there has been speculation about a mega-merger between SCH and BBVA to create a national champion and unchallenged European leader in a country that 20 years ago was considered little more than a financial services backwater.

“A Santander-BBVA merger is possible theoretically, but it is unlikely in 2004,” says Mr Anderson, who believes that the catalyst for such a move would be the long awaited start of cross-border mergers in Europe.

“A merger is possible in the medium term,” he says, “to generate earnings growth and to create a national champion to rival any EU mega-bank that might emerge from this cross-border consolidation.”

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