Risk exposure

  • The effects of Brexit and Donald Trump's victory on Spain's two biggest banks

Spain’s two biggest banks, BBVA and Santander, are already registering the effects of Brexit and Donald Trump’s victory in the US election. And ironically, it’s the global expansion plans that both these banks have pursued - and which enabled them to withstand serious damage when Spain’s financial system crashed in 2012 - that are now putting them at risk: both have big operations in Mexico and the UK is one of Santander’s top three overseas markets (along with Mexico and Brazil).

Trump’s anti-Mexican rhetoric and Brexit have conspired to bring BBVA’s shares down by 10% since the US election and Santander’s by 3.3%. Mexico and the UK are currently viewed as unsafe bets for investors, but whether or not this perception persists depends on the terms of the UK’s withdrawal from the EU and Trump’s behaviour once in office. While it lasts, though, companies with major stakes in either of those two countries will take a hit.

These momentous political events have served to highlight a flipside of globalisation as far as businesses are concerned - namely, increased exposure and vulnerability. When Santander went on an acquisition spree in the nineties, hoovering up lenders from Mexico to Argentina, its board would have laughed you out of the room if you’d told them that Trump, then just a loud-mouthed property tycoon, would one day be US president. They probably would have been similarly incredulous - although less amused - had you told them that, in the same year, the UK would vote to leave the EU.

There was no way of knowing back then, either, that one of Trump’s campaign promises would be to build a wall along the Mexican border, thus keeping as many Mexicans (thoughtfully characterised by the billionaire as rapists and gun-toting drug dealers) out of the US as possible, and cracking down on free trade agreements that have done so well for the Mexican economy. When it become known Trump was to become the 45th president of the United States, the peso fell 13.4% in a single day, to a record low of 20.8% against the dollar. It was the biggest drop the currency had experienced since Mexico almost went bankrupt in 1995. No wonder that BBVA’s shares have plummeted by 10%: the country accounts for two fifths of the bank’s earnings.

Brexit hit Santander similarly hard, with its Q3 UK profit this year down by a crunching 24% compared to the same period in 2015. Given the complexity and uncertainty surrounding the terms of Brexit, the bank has lowered its 2018 profit projection for the UK operation. The woes of Spain’s two biggest banks tell us that, in today’s febrile political climate, global expansion comes at a heavy price.