Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA, Spain's two largest lenders, face a hit to growth in key markets of Mexico and the US if Donald Trump wins a second presidential term.

The Republican former president has spoken about imposing massive tariffs on auto imports from Mexico, where many US automakers have factories. Trump also plans to abolish a $7,500 tax credit on purchases of electric vehicles, from which car lessors like Santander are profiting.

BBVA is Mexico's largest lender by total assets, while Santander is its third largest, S&P Global Market Intelligence data shows.

"Investors will not view a Trump presidency as positive for either of these banks," said Johann Scholtz, bank equity analyst at Morningstar DBRS.

Mexico accounted for almost €8 billion of BBVA's turnover in the first half of 2024, nearly half of its group total, Market Intelligence data shows. Mexican profits for the period stood at almost €3 billion, almost 60% of the group's total.

The country generated about €3.2 billion in revenue and €840 million in profit for Santander in the first half of the year, about 10% and 14% of the group's totals, respectively.

Tariff troubles

In September, Trump said he would impose 100% tariffs on cars imported from Mexico, which he views as benefiting from the relocation of American jobs. He has since doubled down on the threat, warning that he would impose tariffs of 200% or more on auto imports from Mexico.

Trump's plans would be a "big blow" for Mexico's economy if implemented, an Oct. 23 report from Capital Economics said. Mexico exports almost $90 billion worth of finished vehicles to the US every year, accounting for 5% of the country's GDP. Exports of vehicle parts, which Trump is also threatening with tariffs, amounted to almost $40 billion in 2023, or 2.2% of GDP.

Mexico would experience a 0.6% drop in real GDP for every 10% decline in vehicle exports, Capital Economics said. A 10% drop in exports of vehicle parts would knock a further 0.3% off GDP.

"Mexico is one of the most exposed economies globally to a shift towards protectionism because its exports are so tied to the US," said William Jackson, chief emerging markets economist at consultancy Capital Economics. "That would be an environment in which Mexican growth would be quite a lot slower, bank lending would be weaker, banks may become more reluctant to lend and credit risk may be higher."

Trump's proposals threaten nearshoring in Mexico, which is expected to boost its growth in the coming years, according to Capital Economics. Nearshoring is the trend of US manufacturers relocating production to Mexico from Asia due to rising geopolitical tensions and supply chain issues caused by the COVID-19 pandemic.

"BBVA has been very bullish about the prospects of the Mexican economy driven by nearshoring," said Scholtz.

Even if Trump fails to win on Nov. 5, Mexico's competitiveness as a manufacturing hub is likely to face challenges. Harris pledged to reopen the US-Mexico-Canada trade agreement struck in 2020 at the first opportunity and to force Mexico to adopt higher environmental standards and improve labor conditions.

Lease loophole

Trump's plans to scrap tax credits for electric vehicle purchases cause a further headache for Santander, which built a highly profitable US auto financing business in recent years.

Santander, which benefits from the tax credits when it purchases electric vehicles that it then leases out, enjoyed a steady increase in deferred tax assets (DTAs) since the policy was enforced in the third quarter of 2022 with the implementation of the Inflation Reduction Act. Net DTAs at Santander's US business grew 56% to more than €290 million in the second quarter of 2024 since the policy's introduction.

"Santander will pay virtually no taxes in the US this year due to EV tax credits, with tax credits continuing to lower its tax return in the next few years," said Scholtz.

Santander CEO Hector Grísi said during the bank's second-quarter earnings call in August that he did not know if a new administration in the US would continue the policy but that he was hopeful. The Santander chief was less explicit about the issue during the bank's Oct. 29 third-quarter earnings call, but appeared to acknowledge that an end to the policy "changed a little bit the outlook."

An end to the policy, known as the "lease loophole," is likely regardless of the election outcome, an Oct. 17 S&P Global Mobility report said.

"The sale of electric vehicles has really been propped up by the IRA recently," said Jill Louden, associate director, product management at S&P Global Mobility. "If we cut that, it won't be as advantageous for lessors."

More positive for Santander and other car lessors is Trump's pledge to make interest on car loans fully tax deductible, which could boost demand for auto finance. Trump in an Oct. 10 speech said it would make car ownership more affordable for "millions of working American families."

Strength in reserve

The likely negative reaction to a Trump win from BBVA investors would come as Spain's second-largest lender wrestles with problems in its other two core markets. Crippling hyperinflation leaves BBVA's Turkey business struggling to return its former heights, while there is growing uncertainty about the future of its €10 billion bid for Spanish rival Sabadell in its home market.

Since the start of September, BBVA's share price has fallen 4.3% while Santander's is down 1.3%. The S&P Europe BMI Banks index is up 3.2%.

Still, the recent performance across the banks' well-diversified businesses should go some way to cushion any blow felt from political developments in the US. Higher interest rates across the banks' key markets have significantly boosted their revenues and profits since 2022.

Any US tariffs against the European Union, also threatened by Trump, could even support the banks' net interest income for longer than might have otherwise been expected.

"The other side of the coin would be tariffs would lead to higher inflation, keeping interest rates higher for longer, which would benefit BBVA and Santander in Europe," said Scholtz.

Short-term volatility around the Mexican economy is common when there is an election in either Mexico or the US, BBVA CEO Onur Genç said Oct. 31 during the bank's third-quarter earnings call. Genç highlighted the 7% growth of BBVA's loan book in 2018 despite negative growth that year when left-wing candidate Andrés Manuel López Obrador was elected president.

"We're clearly convinced that the Mexican franchise will continue to perform and some of the concerns for the growth of the lending book are unjustified," said Genç.