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1 Reason I Wouldn’t Buy Banco Santander SA Today

Today I am explaining why rising financial woes in Brazil bode ill for Banco Santander (LSE: BNC) (NYSE: SAN.US).

Brazilian slowdown undermines earnings prospects

Although Santander has extensive operations spanning the entire globe, the company’s desire to latch onto juicy growth rates leaves it particularly exposed to the developing regions of South America.

But signs of stagnation in recent times have led many to question these prospects — indeed, the company advised last month that Santanderattributable profit from its Brazilian operations slipped 3% during January-March, and further troubles could be on the horizon as the economy cools there.

Indeed, economists at the country’s central bank again slashed growth projections last week for 2014, the eighth successive weekly cut. The institution now expects the country to advance 0.86% this year, down from 0.9% the previous week and marking a huge departure from Brazil’s actual 2.3% GDP advance punched last year.

The economy is anticipated to bounce back, albeit at modest levels, next year with a 1.5% improvement currently pencilled in. But with industrial production on the slide — output slumped 6.9% in June, the biggest annual decline since 2009 — and consumer spending under the cosh amid rising inflation, concerns persist over whether Brazil could experience prolonged financial weakness.

Brazil is far and away Santander’s largest single market, and is responsible for around a fifth of group profits. So the prospect of worsening conditions here is clearly of huge concern to the firm.

On top of this, fears of contagion from Brazil and Argentina would also most likely upset the applecart for Santander’s other operations in Latin America. The bank sources almost 40% of total profits from the region, and fellow continental heavyweights Mexico and Chile account for 8% and 7% of this respectively.

Santander underlined its confidence in the long-term rewards of Latin America in May when it splashed out €4.69bn to acquire the 25% holding of Banco Santander which was listed on the country’s stock exchange. But with politicians there facing myriad problems to get the economy back on track, Santander could be in store for further earnings bumpiness.

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Royston Wild has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.