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The currency effect gives a break to the most internationalized Spanish companies (and suffocates others) | Economy

View of the Torre Bancomer, of BBVA, in Mexico City, in November 2020.
View of the Torre Bancomer, of BBVA, in Mexico City, in November 2020.Nayeli Cruz Bonilla

For years, the currency has been a burden for Spanish companies with a foreign presence, especially for those with investments in Latin America, where quarter after quarter the devaluation of the currency used to take some of the vigor out of the income statement. But the trend has reversed. In the last year, the Brazilian real has appreciated 20% against the euro, and that is where Banco Santander, the main Spanish bank, makes its biggest profits. Telefónica, through its subsidiary Vivo, and Iberdrola are large market operators there. Something similar has happened in Mexico, where the peso has appreciated by around 13%, once again benefiting Santander and Iberdrola, but also BBVA, the leader in the banking market.

The evolution in the United States is another source of good news for large Spanish companies, including banking. The greenback has come to cut the euro by 14% – the currency of the Old Continent was exchanged in the middle of this month for 1.04 dollars – because the Federal Reserve is raising interest rates faster than the Central Bank European. This is causing the exchange rate to approach a parity that has not been seen since 2002. In this change in the currency effect, there is a notable exception: the collapse of the Turkish lira continues to hit BBVA, owner of Garanti, the country’s largest bank.

“The euro has depreciated in part due to the war in Ukraine, which will affect it more than the rest predictably. The IMF has lowered its growth forecast for 2022 and expects higher inflation. All this will affect Europe a little more than North America or Latin America, where the impact will be neutral or even positive”, explained the CEO of Banco Santander, José Antonio Álvarez, in the presentation of the entity’s first quarter results.

The Brazilian real is already making the income statement grow. The bank’s geographical diversification draws an almost symmetrical picture in the contribution of its three large areas: Europe (34%), which has rebounded strongly this quarter, South America (30%) and North America (27%). And if you look at markets, Brazil and the United States continue to be the engines of the group’s business and are the ones that contribute the most to profits. Hence the importance of the appreciation over the euro of both the real and the dollar for Santander.

The entity chaired by Ana Botín is also present in Mexico, although the Spanish financial group that can benefit most from the effect of the Mexican peso is BBVA. The bank reaped almost half of its profits in the first quarter in this country (777 million euros). Thus, a strong peso will be a breath of air for your accounts.

He knows in depth all the sides of the coin.

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The same does not happen to BBVA with its Turkish subsidiary Garanti, of which it already owns 86% of the capital after the takeover bid to gain control of the entity. The lira has suffered a significant devaluation in recent months, which has affected this operation for better and for worse: on the one hand, the bank has paid less for the part of Garanti that it did not own, although in the same way its value in books is also less, as well as the ability to generate results. At least as long as the country’s currency continues at current values, something that both the president, Carlos Torres, and the CEO, Onur Genç, consider an opportunity due to its potential revaluation.

The large transatlantic banks have another point in their favor for the coming months in the imminent rise in rates in Europe: the ECB has already announced that at the end of the third quarter they will no longer be in negative, and that would help margins entities improve. The uncertainty generated by the Russian invasion of Ukraine has put Spanish banks on alert, not because of their direct exposure, but because of the consequences for the economy as a whole, given that lower growth affects their results. However, the entities that have a part of their business on the other side of the Atlantic come better equipped to these turbulence.

Problems for imports

The effects of currency value changes have their heads and tails. As Joan Tristany, CEO of Amec, the entity that brings together internationalized industrial companies, explains, it is true that a weak euro makes Spanish companies more competitive by being able to sell abroad at a cheaper price. Even in the countries of the euro zone they benefit, because the American competitors offer their most expensive products. Outside the scope of exporting companies or companies established in other countries, the impact is very different. Especially due to the effect of the increase in the cost of key raw materials such as oil and gas, which are paid in dollars, and therefore cause price increases in fuel and electricity.

”The energy issue is very critical at the country level. Because it is not only a productive factor, but a consumer good. We families use it, and with this type of exchange it has a global impact on households, wages or the price of consumer products. It leads us to an escalation of inflation”, says Tristany, who recently visited a metallurgical company for which raw materials and energy account for 70% of its costs.

A temporary effect?

Leopoldo Torralba, an economist at Arcano Economic Research, explains that in certain cases, even companies with interests abroad will not notice the currency effect so strongly, because they have financial hedges to reduce their exposure to their movements. This is the case of Telefónica, which has been issuing debt in Brazilian reais. In addition, Torralba warns that the positive impact for Spanish companies of currencies such as the Brazilian real or the Mexican peso could be temporary. “Latin American currencies have their specific risks and we must be cautious with their future evolution. Emerging countries have a lot of exposure to raw materials, an important part of their income depends on their price, and that can be misleading, because although they have risen in the short term, we believe they will fall as the months go by”, he adds.

In this way, a decline in the price of raw materials would be accompanied by another in emerging currencies. For Torralba, the end of the pandemic restrictions and the Chinese real estate crisis will deflate the price of metals and energy. “To all this we must add the fact that they have fewer health resources and a lower vaccination rate, which increases the risks for recovery,” he concludes.

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