The Latin American operations of Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, like banks everywhere, face rising provisions amid the coronavirus pandemic, but they could nevertheless help insulate their Spanish parent companies, analysts say.

In the 2008 financial crisis, Santander and BBVA's exposure to Latin America and the rest of the world was an important mitigating factor in their exposure to the badly hit Spanish domestic sector, Daniel Lacalle, chief investment officer at fund manager Tressis Gestión, said in an interview.

And ahead of the current crisis, both banks had been counting on strong growth in their largest markets — Brazil in the case of Santander and Mexico for BBVA — to offset anemic economic conditions and historically low interest rates in Europe.

That growth path is now more uncertain as, for the first time, all the banks' geographies are in crisis, Lacalle said. Both Brazil and Mexico recorded their highest daily number of coronavirus-related deaths May 11.

But other experts point out that the impact from the crisis could be less pronounced in these emerging economies.

BBVA owns Mexico's largest bank by assets, Grupo Financiero BBVA Bancomer SA de CV, and has operations in Colombia, Peru and Argentina, while Santander owns Brazil's fifth-largest bank, Banco Santander (Brasil) SA, and is also present in Mexico, Chile and Argentina. Both banks have been present in the region for decades, with Santander creating a Latin American department in 1956 and BBVA beginning its expansion in the 1960s.

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LatAm operations

Both Santander and BBVA derive the biggest chunk of their profits from their Latin American operations, despite these units making up less than a quarter of their respective asset bases.

According to S&P Global Market Intelligence data, Santander derived €1.18 billion in 2020 first-quarter net profit from Latin America, €352 million from Spain and €894.57 million from other markets, which include the U.K. and Poland, similar to 2019 levels.

"Santander's geographical diversification is likely to help the bank weather the economic crisis better than some peers," Pablo Manzano, vice president of global financial institutions at DBRS Morningstar, told S&P Global Market Intelligence.

"It is still too early to know how LatAm is going to be affected by the COVID-19 crisis, but it seems that currently the impact might be less severe than in Europe or North America," he said.

Meanwhile BBVA derived €442 million net income from Latin America in the first quarter, compared to a €141 million loss in Spain and €73 million in net income in other regions. In the first quarter of 2019, the bank generated €820 million of net income from Latin America, compared to €345 million in Spain and €285 million in other geographies, which include Turkey.

The lender's Mexican operations have helped it offset "more challenging situations" in countries such as Argentina and Turkey, Arnaud Journois, vice president of global financial institutions at DBRS Morningstar, told S&P Global Market Intelligence.

"For this year, we expect the activities in Mexico to continue to be a key driver of the group's profitability, despite expected pressure on net interest income and fees because of the bank's position in payment systems there," he said.

"In addition, the measures put in place by the Mexican government are less stringent than the ones put in place in Europe. So overall, profitability in Mexico should be affected but still sufficient in our view to mitigate the negative impact elsewhere."

Economic growth

According to the IMF, gross domestic product in Latin America and the Caribbean is set to contract by 5.2% in 2020, compared to 7.1% in the EU and 8% in Spain.

Javier Santacruz, an economist who specializes in research on the Spanish banking sector at the Instituto de Estudios Bursátiles, a Madrid business school, said Santander could benefit because Brazil may weather the economic storm better, and because the bank may take a more prudent approach in Mexico.

S&P Global Ratings analysts predict a 4.6% GDP contraction in Brazil in 2020, with growth of 3.3% in 2021, and a 6.7% contraction in Mexico's GDP in 2020, followed by a rebound of 2.9% in 2021.

Provisions

BBVA Mexico's first-quarter net income fell to €393.9 million from €654.7 million the year before, as loan loss provisions soared to €741.1 million from €349.7 million. At Santander's Brazilian operations, first-quarter net income was €789.4 million, down from €843.4 million the year-ago period, while provisions stood at €710.9 million, down from €725.7 million.

Lacalle predicted that, ultimately, the coronavirus crisis would result in "very large provisions" for both banks.

The mid-term implications of such a shock could be significant, as companies the banks lend to are hit by a "triple negative effect" of falling foreign exchange reserves, rising nonperforming loans and declining exports in Brazil and Mexico, he said.

They also lend significant amounts to the energy sector which is in dire situation, Lacalle said.

BBVA's exposures at default — a bank's total exposure when a borrower fails to make repayments — for the upstream and oilfield services stood at €4.70 billion as of March 2020, with about €200 million coming from Mexico.

According to Market Intelligence's Market Signal probability of default model, the Mexican energy sector has the biggest risk of nonpayment among industries at 17.6%.

Oil prices have slumped as planes are grounded and people are confined at home, and as a result of a price war between Saudi Arabia and Russia in March.

BBVA CEO Onur Genç said in an April 30 earnings call that the bank's Mexican net fee income would come under pressure because of less demand for payment services, but said he remained confident about the bank's strong franchise in Mexico.

Santander CEO José Antonio Alvarez told analysts April 28 that the bank had already endured a deep 2015-2016 recession in Brazil and that, although provisions would rise, its operations in the country were "much more resilient with much higher profitability."