Jules Stewart
Two Spanish banks, BBVA and Banco Santander Central Hispano (BSCH), hold by far the largest positions in Latin America of any foreign banks and both have taken a painful hit from the Argentine debt crisis. BBVA and BSCH have over the past five years invested some $25 billion in a Latin spending spree, buying, upgrading and restructuring local banks.
For BSCH, the more exposed of the two, Latin America accounts for 33.5% of group profits compared with 20.4% for BBVA, after minorities in both cases. The only other foreign institution with major Latin American exposure is Dutch bank ABN Amro, with 14% of its profits coming from the region, although Brazil accounts for the bulk of its business.
So far the market has tended to play down any threat of a disaster. “Both banks hold very liquid balance sheets throughout the region, as lending has been subdued and the main focus has been on deposits and asset gathering,” points out José Luís de Mora, European banks analyst at Merrill Lynch. “We understand BBVA’s balance sheet in the region to be slightly more liquid than BSCH’s.” De Mora expresses confidence that BBVA and BSCH are likely to overcome an isolated problem in Latin America because of their diversification of risk across the region. “If the effect were to spill over to the rest of Latin America, a highly unlikely scenario, BSCH has higher exposure than BBVA to the region as a whole,” he says.
The Spanish banks have by and large played a cautious game in Latin America, with low loan-to-deposit ratios and an extremely conservative approach to credit risk. BSCH and BBVA report lower non-performing loan (NPL) ratios than do local competitors.
Both banks have more than 100% bad debt coverage ratios in Latin America. Although BBVA is marginally better covered than BSCH, this does not include its recent acquisition of Mexico’s Bancomer, which would take it down to around the BSCH level. “Generally speaking we assume both banks could support a 50% increase in bad debt ratios without too much diYculty,” says De Mora.
Despite its larger exposure, BSCH may have more control over its regional market position. BSCH’s policy, unlike that of its rival, has been to acquire majority ownership of Latin American bank subsidiaries.
The big question for the banks is whether the Argentine crisis will spill over into other Latin American countries. The betting is against a systemic crash: Argentina’s problems stem largely from a domestic political crisis of conWdence, and the major Latin American economies are at different stages of the cycle.
The market seems to support this limited-damage view. True, BBVA and BSCH lost an alarming 10% and 8% of their respective market value when the Argentine crisis broke. But this was a far cry from the 30% or so that was lopped off their share prices in the 1998 Latin American financial crisis.
The worst fears stem from an Argentine peso devaluation. If Argentina devalues, as many loans are denominated in dollars non-performing loans would rise quickly and banks would have to make big provisions against their dollar-denominated loans. If the rest of Latin America were contaminated, it could be very tough for banks. “We don’t expect Argentina to devalue in the short term and a debt renegotiation is a much more feasible scenario,” says Carlos Pertejo, banking analyst at JP Morgan. “The market has probably over-reacted.”
Pertejo points out that Argentina accounts for 3% of BBVA’s total assets while Chile and Brazil, the countries having the strongest regional relationship with Argentina, account for another 1% and 2% respectively. “In the worst-case scenario a major crisis would only aVect 6% of BBVA’s assets so if the crisis does not spill over it is not a big problem,” he says. BSCH is in a slightly more exposed position since Argentina, Brazil and Chile represent 10% of its assets. Yet a systemic crisis would not be viewed as catastrophic for the bank.
A more worrisome question is whether Spanish banks have been chasing fool’s Inca gold. The lack of profitability from their Latin American operations, particularly in the case of BBVA, must be causing top management to have second thoughts about the spending of the past few years, especially in view of the raging success they are enjoying in domestic retail operations. “The contribution of BBVA’s Latin American banks has been negative in the past few years, owing to extraordinary provisions and the acceleration of goodwill depreciation,” says JP Morgan’s Pertejo. He estimates that Latin America made a negative contribution equivalent to 7% of BBVA’s attributable net income in the first nine months of the year, including goodwill depreciation and non-recurring extraordinary charges. “The contribution of BSCH’s Latin American banks is now positive,” he says, calculating a 10% contribution to attributable net income in this period. BSCH was first into Latin America and has spent more time restructuring its regional banks. It also holds a strong franchise in profitable markets such as Chile, whereas BBVA’s exposure is higher in troubled countries such as Peru, Colombia and Venezuela.
BBVA and BSCH have spent a lot of time and money improving credit systems in their Latin American banks and sending in outside management. “Both have a good track record in asset quality,” says María José Lockerbie, analyst at rating agency Fitch. “However, they talk about proWtability from Latin America but this is a distorted picture,” she says. “Margins get a boost because this is a high-growth market. But the two big Spanish banks have had to do a lot of NPL provisioning and this has damaged proWts. If you remove all the amortization of goodwill, the 1999 profits from the region are almost nil.”
