Please ensure Javascript is enabled for purposes of website accessibility

How Brexit is Affecting this Banking Giant

By Motley Fool Staff – Jul 24, 2016 at 3:03PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Already razor-thin net interest margins could continue to see pressure as a result of Brexit.

Brexit could weigh on the banking industry's profits for years to come. Among the most affected could be Banco Santander (SAN 0.69%), 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.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

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. 

Gaby Lapera has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Banco Santander Central Hispano Stock Quote
Banco Santander Central Hispano
$2.93 (0.69%) $0.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.