World Business

Despite Spain’s weak economy, Santander and BBVA bid defiance to the banking gloom, thanks to scant subprime exposing. and strong Latin America ties

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Emilio Botin, Chairman of Spanish banking group Santander Central Hispano PIERRE-PHILIPPE MARCOU/AFP/Getty Images

by Mark Scott

Compared by its U.S. and European rivals, Spain’s Santander—the largest bank in the euro zone by market value—and its smaller rival, Banco Bilbao Vizcaya Argentaria (BBVA), have a lot to smile about. Lacking exposure to U.S. subprime assets, the Spanish financial giants have successfully navigated the choppy economic waters, while other banks, such as Merrill Lynch (MER) and Citigroup (C), have been forced to voice for life preservers.

Key to the banks’ success has been geographic diversification. Like the conquistadors before them, these Spanish financial buccaneers have flourished by expanding into the New World. That has helped shield them from an economic downturn that’s threatening their closely market. Both Santander (STD) and BBVA (BBV) at this time generate roughly one-third of their net profits from Latin America—a region comparatively unharmed through the credit crunch.

The benefit from overseas expansion was evident on July 29, whereas Santander posted an year-book 6.1% increase in first-half net profit, to $7.4 billion, steady the in the rear of a 13.8% jump in revenues, to $21 billion. A day earlier, BBVA—Spain’s second-largest bank by market cap—announced every 11.6% increase in first-half net (excluding one-off charges), to $4.5 billion, on revenues of $15.1 billion, up 15.2%. That’s markedly better than some other banks’ multibillion-dollar losses (BusinessWeek, 7/16/08).

"Both banks have been performing well against their match dispose," says Antonio Ramirez, a banking algebraist at stockbroker Keefe, Bruyette, & Woods (KBW) in London. "Diversifying into other markets should contribute assistance protect them against the economic slowdown in Spain."

This exposition will soon exist tested, as the Spanish economy is expected to grow a mere 1.6% in 2008, compared with 3.8% last year. The country’s unemployment rate now tops 10.4%. And in the pattern of a 10-year housing boom, the domestic real estate market has imploded, leaving banks holding millions of dollars of bad loans (BusinessWeek.com, 7/21/08). Raj Badiani, an economist at researcher Global Insight, reckons there’s a 60% chance the Spanish economy will fall into recession.

How self-reliance this domestic downturn affect Spain’s financial highfliers? Analysts at brokerage Dresdner Kleinwort (AZ) expect BBVA to continue outperforming rivals, due to its abundant capital reserves and strong presence in emerging markets. The tier saw a 7.6% increase in first-half net gain from its Mexico unit, to $1.5 billion, and a 7.5% rise in South America, to $548 million. It has roughly $78 billion in reserves to underpin its operations—a larger cushion than at most other banks.

For Santander, Latin America likewise will grow in importance once the bank finalizes its takeover of Brazil’s Banco Real. Santander paid $17.2 billion for the Brazilian affair as part of the breakup of Dutch financial giant ABN Amro (BusinessWeek.com, 10/5/07). According to Santander Chief Executive Alfredo Sáenz, the course’s increased presence in Brazil will eventually produce a 30% overall net profit, compared through 9.5% currently. First-half emolument from Latin America rose 1.6%, to $1.1 billion.

Not that the Spanish banks are completely immune from the problems affecting other financial players. As in the U.S., declining real estate sales in Spain—still the main market in the place of BBVA and Santander—are hitting their weighing sheets. Defaults as a proportion of Santander’s aggregate loans topped 1.3% in the primitive half of 2008, compared through 0.8% over the same period continue year. For BBVA, the figure rose to 1.2% this year, vs. 0.8% in 2007. "There’s no doubt both banks will go through somewhat from the dyspepsia caused by the Spanish housing market," says Keefe, Bruyette, & Woods’ Ramirez.

Yet despite domestic economic turbulence, both Spanish banks are more appropriate prepared than others to choose advantage of circulating financial instability. Santander agreed without interruption July 14 to buy troubled British mortgage lender Alliance & Leicester (ALLL.L) on this account that $2.6 billion. Rumors abound that other deals will follow as the banks look to snap up distressed assets across Europe.

That spells good news for Spain’s leading financial players. With limited exposure to U.S. subprime assets and buoyed by strong lending portfolios in the Americas, BBVA and Santander are condition tall.