As the situation in emerging markets deteriorates, investors are scrambling to protect their portfolios from the turmoil and a potential emerging markets crisis.
Almost all the FTSE 100‘s constituents are likely to be affected in one way or another by emerging market troubles, and the banking sector will suffer the most from any economic crisis. The question is, how exposed are banking sector favourites Santander (LSE: BNC) and Barclays (LSE: BARC)?
Scaling back
Barclays has been scaling back its international operations since the financial crisis and now the bank is relatively UK-focused.
Indeed, Barclays’ personal and corporate banking division was responsible for around 40% of the group’s pre-tax profit during the first-half of the year. This segment is mainly UK and US focused. Also, Barclaycard contributed around 21% of first-half group pre-tax profit. The majority of Barclaycard’s customers are located within Europe, the UK and US.
However, Barclays’ African arm could be heading for stormy waters.
African exposure
Barclays Africa is based in South Africa, which is one of the emerging markets that has been attracting a lot of negative coverage recently. The South African rand slumped to an all-time low against the dollar and many of the country’s state-run companies are on the verge of collapse, threatening to crush already weak economic growth.
Still, Barclays Africa is only a small part of the Barclays group. Barclays’ African arm generated only 15% of group pre-tax profit during the first half and assets only amount to 4.5% of total group assets.
The other part of the Barclays group that could be impacted by the crisis is the company’s investment bank. That said, profits at investment banks tend to increase as markets become more volatile — there are more opportunities for traders to take advantage of.
Bucking the trend
Like Barclays, the majority of Santander’s profits come from developed markets such as Spain, the US and UK. These three key markets accounted for 45% of the group’s gross income during the first half and expanded 6% overall year-on-year.
Unfortunately, Santander is the largest overseas bank doing business in Brazil, another emerging market that has been hit hard by recent market turbulence. Brazil is plagued by rising inflation, slowing growth, a weakening currency and surging debt levels.
Brazil accounts for a quarter the Santander group’s gross income and at present, Banco Santander Brasil SA, Santander’s Brazilian subsidiary, is bucking wider market trends.
Second-quarter profit at the division topped estimates by 16% as a jump in interest income helped offset the impact of rising expenses and declining loan disbursements. Recurring profit jumped 16.6% year-on-year. What’s more, Banco Santander Brasil SA, Santander’s Brazilian subsidiary recently announced that it was making a competitive offer for the local unit of HSBC Holdings Plc. HSBC Brazil has been valued at $3.6bn or 1.2 times book value.
So, as long as Santander can continue to grow in Brazil, the bank might be able to avoid the emerging markets crisis.
