Sara Nunnally, Senior Research Director, Taipan Publishing Group
Late October, Brazil and Argentina announced that their governments would buy up private assets in financial markets.
Brazil’s plan would allow its state-controlled banks (Banco do Brasil and Caixa Economica Federal) to buy stakes in private financial institutions. Argentine President Cristina Fernandez de Kirchner announced that the government would take over the $30 billion private pension fund.
These announcements pushed Latin American markets well into the red, but they also knocked Spain’s Ibex index off 184 points, or 2%.
That should come as no surprise. Spain and Latin America have many economic ties, and some Spanish companies do so much business across the pond that 29% of net profits come from that region.
So when news of nationalization hit last week, naturally Spanish markets shuddered… With good reason.
Just look at Bolivia and Venezuela, both controlled by heavily nationalistic leaders.
Venezuela has had three major blackouts this year. Some areas spent more than two weeks without power at a time. Bolivia continues to buy up local and international stakes in its natural gas pipeline infrastructure, but it’s been shipping less than 50% of its contracted amount of natural gas to Argentina since September.
Problems like this led to a severe power crisis last summer, and forced Argentina to buy energy from Brazil.
So the question is… Will government intervention result in protection from global markets, or will pensioner and investors alike be holding worthless papers and wondering where all their money went?
And how will markets in both Latin America and Spain respond?
We know the first knee-jerk reaction was not good. In fact, after the news, Argentina’s main index fell 8.3%, Brazil’s fell nearly 7%, and Mexico’s dropped more than 4.5%.
And yet, markets started to rally back a couple days later… And get this: Spanish banks are posting jumps in earnings, thanks in part to their Latin American divisions. That flies directly in the face of what some analysts were saying last week after those nationalization announcements.
Let’s take a closer look.
Banco Santander (STD:NYSE), Spain’s largest bank, announced net profits from its Latin American units climbed 6% in the first nine months this year compared to the first nine months of 2007. And the group’s net profits rose a collective 9.1% for the past nine months, and 4.3% in the third quarter alone.
Here’s what’ll blow you away though… The bank’s third-quarter profits for Latin America clocked in at 1.12 billion euros (US$1.45 billion) – an all-time high for the group.
I know what you’re thinking, “Okay, those numbers are good, but it’s only a matter of time before bad loans and credit crunches catch up to these guys, right?”
Not quite…
You see, Spanish banks operate differently than other international banks. They chose not to buy any of the risky subprime mortgages during the banking heyday and the housing bubble.
Actually, one Spanish bank, BBVA Group (BBV:NYSE), who also posted good earnings for the third quarter this year (net profit is up 5.6%), even called U.S. banks “immoral” lenders.
Have non-performing loans (NPLs) increased? Sure… BBVA’s NPL ratio jumped from 1.2% to 1.5% and Santander’s ratio climbed to 1.6% from 1.3%. But get this… Santander’s loan coverage ratio is at 116%, meaning it has enough cash to cover those non-performing loans. BBVA’s coverage ratio is even higher at 127%.
These guys are at rock-bottom prices, and I consider both strong companies. Both have sizable dividends as well. Could they go lower? Yeah, maybe. We’ve watched these financially stable companies get halved over the past year, just for being in the financial business.
The IMF still maintains that Latin America will weather this storm… that countries are expected to deal with this current crisis better than previous crises… and that the region will grow 3% next year, which is close the emerging market average forecast.
It’s time to take a wide-angle, long-term view on growing markets with strong companies. That’s Latin America and these two companies.
Late October, Brazil and Argentina announced that their governments would buy up private assets in financial markets.
Brazil’s plan would allow its state-controlled banks (Banco do Brasil and Caixa Economica Federal) to buy stakes in private financial institutions. Argentine President Cristina Fernandez de Kirchner announced that the government would take over the $30 billion private pension fund.
These announcements pushed Latin American markets well into the red, but they also knocked Spain’s Ibex index off 184 points, or 2%.
That should come as no surprise. Spain and Latin America have many economic ties, and some Spanish companies do so much business across the pond that 29% of net profits come from that region.
So when news of nationalization hit last week, naturally Spanish markets shuddered… With good reason.
Just look at Bolivia and Venezuela, both controlled by heavily nationalistic leaders.
Venezuela has had three major blackouts this year. Some areas spent more than two weeks without power at a time. Bolivia continues to buy up local and international stakes in its natural gas pipeline infrastructure, but it’s been shipping less than 50% of its contracted amount of natural gas to Argentina since September.
Problems like this led to a severe power crisis last summer, and forced Argentina to buy energy from Brazil.
So the question is… Will government intervention result in protection from global markets, or will pensioner and investors alike be holding worthless papers and wondering where all their money went?
And how will markets in both Latin America and Spain respond?
We know the first knee-jerk reaction was not good. In fact, after the news, Argentina’s main index fell 8.3%, Brazil’s fell nearly 7%, and Mexico’s dropped more than 4.5%.
And yet, markets started to rally back a couple days later… And get this: Spanish banks are posting jumps in earnings, thanks in part to their Latin American divisions. That flies directly in the face of what some analysts were saying last week after those nationalization announcements.
Let’s take a closer look.
Banco Santander (STD:NYSE), Spain’s largest bank, announced net profits from its Latin American units climbed 6% in the first nine months this year compared to the first nine months of 2007. And the group’s net profits rose a collective 9.1% for the past nine months, and 4.3% in the third quarter alone.
Here’s what’ll blow you away though… The bank’s third-quarter profits for Latin America clocked in at 1.12 billion euros (US$1.45 billion) – an all-time high for the group.
I know what you’re thinking, “Okay, those numbers are good, but it’s only a matter of time before bad loans and credit crunches catch up to these guys, right?”
Not quite…
You see, Spanish banks operate differently than other international banks. They chose not to buy any of the risky subprime mortgages during the banking heyday and the housing bubble.
Actually, one Spanish bank, BBVA Group (BBV:NYSE), who also posted good earnings for the third quarter this year (net profit is up 5.6%), even called U.S. banks “immoral” lenders.
Have non-performing loans (NPLs) increased? Sure… BBVA’s NPL ratio jumped from 1.2% to 1.5% and Santander’s ratio climbed to 1.6% from 1.3%. But get this… Santander’s loan coverage ratio is at 116%, meaning it has enough cash to cover those non-performing loans. BBVA’s coverage ratio is even higher at 127%.
These guys are at rock-bottom prices, and I consider both strong companies. Both have sizable dividends as well. Could they go lower? Yeah, maybe. We’ve watched these financially stable companies get halved over the past year, just for being in the financial business.
The IMF still maintains that Latin America will weather this storm… that countries are expected to deal with this current crisis better than previous crises… and that the region will grow 3% next year, which is close the emerging market average forecast.
It’s time to take a wide-angle, long-term view on growing markets with strong companies. That’s Latin America and these two companies.