Spain’s biggest banks aren’t getting much joy from their foreign operations. Volatile currencies in Latin America and Turkey have hurt both Santander and its smaller rival BBVA in the third quarter. The latter took a 1.8 billion euro writedown in Turkey after it bought an additional 15 percent stake in Garanti. That was expected, but the slow progression on capital is troubling.
BBVA, which generates around 70 percent of earnings from emerging markets, faced a particularly difficult quarter thanks to market volatility. Its core Tier 1 capital ratio fell to 9.8 percent from 10 percent flagged in June. The ratio was hit by the sliding Mexican peso and Turkish lira, as well as the fall in market value of its China CITIC Bank and Telefonica stakes, the latter hit by Brazilian jitters. Those factors knocked 29 basis points off capital, offsetting 18 basis points generated via earnings.
Meanwhile, capital only grew two basis points at Santander to 9.85 percent, despite posting 1.7 billion euros in third-quarter earnings. Reduced gains on sovereign bonds held in so-called “available for sale” portfolios – mainly from troubled Brazil – didn’t help. The uncertain outlook in Brazil, which makes up about a fifth of Santander’s profit, has lopped off a quarter of its value since mid-July.
Some of these same factors led to a fall in another important metric: tangible book value per share. Santander’s ratio dropped 2 percent from June, according to analysts at Deutsche Bank. The fall at BBVA was much larger at 7 percent, driven also by a 1.1 billion euro loss in the quarter, including the Turkish writedown.
This may all just be temporary. Both banks reckon they will reach a capital ratio target of 10 percent by the end of the year. This seems plausible: BBVA pointed out that the recovery in the market in October has already added back 20 basis points. But the prospect of tightening yields in the United States could hit emerging market currencies further. Santander still plans to be above an 11 percent target core ratio by 2018. The snag is that its European peers are already at that level or above.