Brexit could weigh on the banking industry's profits for years to come. Among the most affected could be Banco Santander (SAN +0.67%), a company with banking units all around the world, from the United Kingdom to Latin America.
Join The Motley Fool's Gaby Lapera and contributor Jordan Wathen to learn why Brexit could negatively affect Santander's earnings.
A transcript follows the video.
This podcast was recorded on July 18, 2016.
Jordan Wathen: One of the big problems, we'll just get this out of the way, because this is a problem that's really unfortunate in the timing, just the way it works. The bank reports its earnings in euros, the euro is much stronger against the Mexican peso, against the pound, for example, than it was six or 12 months ago. When it translates those earnings back into its home currency so to speak, whatever it earns overseas is automatically lower.
Gaby Lapera: Yeah, so it looks like they earned less. It basically is that they earned less than you would have had if those loans had been made in euros. One of the things that's really been affecting this actually is Brexit. I don't know if you've caught onto this with what Jordan was talking about, but Santander has a really big presence in Latin America, South America, especially in Brazil, Argentina, Chile. There's a lot of volatility in South America, I don't know if people know that. I don't know if they think about South America as a place to invest in very frequently, but South America is a very interesting place, full of a lot of opportunities, but very risky opportunities. I think Santander is feeling that right now in particular.
Wathen: Right. It's hard to imagine how Brexit and then Latin America could be related, but really when you think about Santander, if you look at its 2015 profits, about 23% of it came from the U.K., give or take. That's expected to be its core earning space, where you expect some stability. Of course, Brexit throws that out the window. It's very hard to make money in the U.K. right now as a lender. Recently, in 2015, Santander earned about 1.8% net interest margin on its loans. The difference between its deposit or funding costs, and what it was earning on its loans that it was making, which is very thin margin.
Lapera: That's so low.
Wathen: Most people expect that to come down even further, because yields are down considerably in the U.K.. The 10-year yield in the U.K. was 1.6% in January and now it's down to 0.8%, so you have a 50% reduction right there.
Lapera: Right. The U.K. was being used to smooth out the volatility that you're seeing in Latin America. One of its most important markets, like I said, was Brazil, or is Brazil, in Latin America. Brazil's in the middle of the worst recession that they've ever experienced right now.
Wathen: Brazil's having a bit of trouble. The IMF expects now that Brazil's economy will shrink by about 3.8%. Argentina's also expected to shrink by about 1%, and then even among growing countries in Latin America, like Chile is expected to grow 1.5%, Mexico to grow 2.4%. Santander operates in all these countries. As Latin America as a whole is expected to shrink by 0.5% this year, in 2016, which would be the second negative growth year in a row, or the second year of contraction in a row.
Lapera: Right. When you take the contraction that we're seeing in Latin America and then you pair it with the contraction that you're going to probably see post-Brexit, you get bad news for Santander, because Santander was relying on the U.K. to smooth out any volatility that it would have in its South American markets.
