Wednesday, 5 December 2012

Banks in Latin America: ‘Reconquest’ of New World is lifeline as profits suffer at home


When Spanish banks led by Santander and BBVA – along with a host of Spanish non-financial companies – began investing heavily in Latin America in the 1990s, it was quickly dubbed a “reconquest” of the New World by its original colonial masters.
Santander office in Rio de JaneiroNearly two decades later, the parallel is even more striking. Just as the continent’s gold and silver mines did 400 years ago, Latin America’s banking industries are providing a basis of support and defence at a time of increasing insecurity in Spain.
Last year, Santander and BBVA made more money from their operations in Latin America than they did at home. This year, reckons Credit Suisse, more than €5bn of Santander’s estimated €7bn of profits will come from Latin America, with Brazil generating more profits than its operations in Europe (including the UK) combined.
Of course, one reason for the rising importance of Latin America for both banks is the dwindling role played by profits at home. In the past few years, the significance of their Latin American operations has grown sharply.
“The expansion of Spanish companies into Latin America was their first step to become global. Now it has become their way to survive,” José Antonio Ocampo, a Columbia University economics professor and former Colombian finance minister, told the FT this month.
Nothing illustrates this more clearly than the enormous share issues undertaken in the region by Santander since the onset of the global financial crisis, overcoming what for many other would-be issuers were dauntingly adverse market conditions. Santander raised $7bn in an initial public offering of its Brazilian business in 2009 and raised another $4.1bn this year in Mexico.
Both issues were crucial in improving the bank’s capital ratios in Madrid, in response to pressure from Spanish and European regulators.
Last month, BBVA said it would consider following suit by listing Bancomer, its Mexican bank, which accounted for half of group profits last year.
That, however, is not a trick that can be pulled off very often. If Latin America is to continue holding out a lifeline to Spanish banks, it must offer sustainable growth.
This has meant some rethinking of strategy. When Santander and BBVA begin investing in the region from the mid-1990s, Santander at first went after banks with significant interests in investment banking and bought large shareholdings. BBVA, in contrast, gradually built partnerships with local banks by buying small initial stakes.
In Brazil, its biggest market, Santander has changed its focus, concentrating less on wholesale banking and more on retail banking, where the potential for growth is greatest given the large numbers of people – about 16m adult Brazilians – that still do not have bank accounts.
In Mexico, BBVA’s strategy has long been a gradual expansion of its retail operations, in a market where less than a third of the adult population uses banking services.
So it is fortunate for both banks that Spain’s economic troubles have coincided with a spurt of economic growth in the New World. It is true that in Brazil – where Santander is strongest and BBVA is absent – growth has been erratic. GDP grew by 7.5 per cent in 2010 but was followed by just 2.7 per cent in 2011 and an estimated just 1.5 per cent this year.
In Mexico – BBVA’s biggest market in the region, much less important for Santander – GDP growth is steadier at about 4 per cent a year.
But despite Brazil’s erratic growth, its banking sector holds similar promise to Mexico’s. In both countries, incomes have risen sharply over the past few years, bringing goods and services into the reach of tens of millions of new consumers. As they join the middle classes, many consumers want not only a bank account but also access to credit and to more sophisticated products such as life and health insurance.
But Latin America’s markets offer no guarantees of easy growth. In Brazil, especially, analysts and investors have been worried by government pressure on banks to keep a consumer boom alive by offering ever cheaper and more abundant credit. The government has driven down interest rates at the big public-sector banks and pressed them to offer new forms of lending. Private-sector banks have been obliged to follow suit, leading to a worrying spike in rates of non-performing loans this year.
Such pressures have eased off in recent months as the government appears to have recognised that cheap credit can be destabilising. But Brazil’s willingness to intervene in both the public and private sectors has set warning lights flashing.
This kind of unpredictability is an even greater worry in Argentina, where Santander and BBVA are the only two big foreign banks in operation. The Spanish and Argentine governments have been in a state of open hostility since the expropriation of Repsol’s stake in YPF, the oil group, this year.
There is no such hostility in markets such as Chile and Colombia – nor, indeed, in Mexico or Brazil.
Compared with Spain and the rest of Europe, they look increasingly like a new El Dorado.

Read the full story here.


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