Credit Suisse warns of the ‘headache’ Brazil could give Santander in 2022

RIO DE JANEIRO, BRAZIL – Credit Suisse analysts believe that Brazil is a source of uncertainty for Banco Santander. The bank has high exposure to the South American country. Like the United States, it represents about 28% (€1,76 million) of all earnings attributable to the parent company, so it is not a trivial issue. The country faces a 2022 year full of uncertainties, which will crystallize in the outlook for investors. The Brazilian elections next October in which Bolsonaro’s continuity is at stake, and even the potential impact of the US Federal Reserve (Fed) rate hikes on emerging markets are the main risks.

Credit Suisse values Banco Santander‘s diversified business model but prefers to adopt a cautious stance regarding its presence in Brazil, according to a recent report consulted by La Información. The country’s economy is highly likely to deteriorate during 2022. Political uncertainty is one of the elements that will most pressure the Brazilian real. Presidential elections will be held on October 2, so its currency brokers foresee an increase in the risk premium that will jeopardize the currency’s upward potential in its exchange rate against the dollar.

The investment firm estimates that a 10% depreciation of the Brazilian real would negatively impact 2% on the group’s 2022 earnings. In addition, it believes that financial support has so far served as a shield to maintain asset quality artificially. “It has prevented or at least delayed the emergence of bad debts”. In any case, the NPL ratio has begun an upward trend, rising steadily since April 2021. As stimulus fades, Credit Suisse economists expect Brazil’s gross domestic product (GDP) to suffer next year, falling 0.5% year on year.

US monetary normalization may trigger slowdowns in emerging markets.

Credit Suisse also warns about the possible consequences of changes in the interest rate cycle in the United States. It relates in its report that traditionally, the Fed’s return to monetary normalization, in the past, has been preceded by economic slowdowns in emerging markets, as could be seen during the period from 2015 to 2018. Most currencies depreciated against the dollar in the initial phase of rate hikes, with the Brazilian real and the Mexican peso noting this trend.

It so happens that the Fed has already stopped using the term ‘transitory’ to accompany the behavior of inflation. The rise in prices has caused the US monetary body to cut stimuli earlier. Interest rates currently remain in a range between 0% and 0.25%. But this situation looks set to change. The Federal Reserve is prepared to raise the price of money at least three times over the next year to lower inflation.

It welcomes cost-cutting in Spain, although it fears that the omicron variant will slow down the country’s growth and affect its business.

Despite its negative stance on Brazil, where it expects costs to rise and credit to be hampered, Credit Suisse is more optimistic about Mexico. In the Aztec country, it estimates that it will be able to increase its revenues by 9% in 2022 and up to 13% in 2023. In Spain, it is also very optimistic about the reduction in costs. Ordinary attributable profit through September rose 47% year-on-year in the Spanish business, mainly due to the sharp reduction in its structure. At the end of 2020, the bank sealed the departure of 3,572 employees. The Redundancy Program (Expediente de Regulación de Empleo, ERE) has been materializing during the current year.

Not surprisingly, it believes that its Spanish and European businesses could falter if the recovery slows down, especially considering the new omicron variant’s impact and the new measures that some countries are implementing to contain its rapid expansion. Most international authorities are lining up to downgrade growth forecasts. The International Monetary Fund (IMF) has recently joined the Bank of Spain, the European Commission, and the OECD in giving a new ax to the forecast advance for Spanish GDP.