Few banks know more about the agony and the ecstasy of merging two distinct business cultures than the recently renamed Santander Central Hispano. The Spanish bank’s two years of existence as a merged entity have been dogged by a bitter power struggle. This culminated in the summer in blood on the carpet after a spectacular boardroom row led to the departure of one of the two men supposed to meld its two parts into a seamless whole (see page 30). Even what to call the merged entity remains a matter of contention: the abandonment of the BSCH (Banco Santander Central Hispano) branding leaves Santander as the key name and threatens to cast Central Hispano into oblivion.
For all that, what is now Spain’s largest banking group has been thriving commercially. It’s one of a new breed of Spanish banks, thrusting and global in focus, that have made their lumbering rivals in the UK, France and Germany look staid. Santander Central Hispano has not only taken audacious footholds in Latin America, it has also built cross-shareholdings in other banks across Europe that might one day put it at the head of a powerful grouping that can take full advantage of the single European currency.
With Emilio Botín, the bank’s autocratic chairman, now holding undisputed sway, it could have a bright future. So is Santander Central Hispano the visionary shape of banks to come, or will it pay a high price for its boldness in an increasingly hostile economic climate?
An exception to orthodoxy
The current orthodoxy is that in most cases bank mergers at worst don’t work or at best bring few gains in efficiency. UniCredito Italiano recently abandoned an attempt to gobble up Commerzank, thereby stymying the creation of the first significant pan-European retail bank. Yet Santander Central Hispano looks to be an exception. With remorselessly professional management, its revenues have been rising, making it Europe’s fourth most profitable bank.
At the time of the merger two years ago between Banco Santander and Banco Central Hispano, the deal was presented to outsiders as a seamless fit. The culture at Santander was loose and informal. The bank had quick entrepreneurial reflexes but had grown into a national player with global ambitions; it needed structured management. Enter BCH, a bank with a completely contrary culture that no-one had considered a likely partner. The union was a bold gamble. It has paid off, apparently, but not without engendering bad blood.
This summer the power struggle between the two teams erupted horribly publicly. Botín, the all-powerful chairman of Banco Santander, and José María Amusátegui, Banco Central Hispano’s chief, had been set to share the leadership of the new banking group until March next year. After a vicious battle that resulted in a convulsion that threatened to draw the central bank in the conflict, Botín finally emerged victorious.
Standard&Poor’s banking analyst Jesus Martínez says: “We always said that the Santander Central Hispano merger would be much more difficult than some others because both banks have a strong culture and long history.”
With the bloodletting out of the way the bank has now buckled down again to its managerial approach. A delayed second round of consolidation is about to be launched. Existing brands are to be dropped in the hope of making further savings and forging a single identity for the bank as euros begin to jingle in consumers’ pockets. The unimaginatively named Programa Dos is a relaunch of the merger process that began in 1999, and will focus on rigorous cost control. Santander Central Hispano’s CEO, Angel Corcóstegui, is confident that success in this new era of European banking lies in efficiency. “In the future in Europe, only those banks that can operate with a very low cost base and offer the very best quality of service will be able to compete,” he says.
Turmoil in the boardroom has not been mirrored by the group’s results. In the first two-year phase of merger the bank grew by 50% (measured on an average of assets, loans, and mutual fund growth). Santander Central Hispano invested e16.9 billion ($15.5 billion) over the two-year period. Of this, e6.5 billion was spent in Europe, including the acquisition of Banco Totta&Açores two years ago, which gave the Spanish bank a market share in Portugal of around 11%. It is expected to double its profits in three years.
Elsewhere in Europe, Santander Central Hispano increased its stakes and built up strategic alliances with the Royal Bank of Scotland, France’s Société Générale, Germany’s Commerzbank and Italy’s Sanpaolo IMI. Santander Central Hispano’s European holdings accounted for 15% of the group’s net profits in the first half of 2001.
In Latin America the group invested e10.4 billion to acquire Banespa and the Meridional group in Brazil, Banco Serfín in Mexico and Banco Caracas in Venezuela and to raise its stakes in other subsidiaries. By the end of 2000 the book value of the bank’s Latin American subsidiaries was about $12.2 billion, of which $7.6 billion came from the previous year’s investments. Early this year Santander Central Hispano successfully bid for Banespa’s minority interests, increasing the total holding to $8.8 billion. The group is now the leading retail banking franchise in the region.
The first phase of amalgamation of the two banks is now complete. Back-office services and IT systems have been grouped together with an eye on cost reduction and the improvement of cross-selling opportunities. And the closure of 1,000 branches has resulted in efficiency gains in all its businesses. The board also unified all areas of risk management into one division that is outside the general management of the business. This is run by Matías Rodríguez Inciarte, a former Banco Santander executive. This has improved Santander Central Hispano’s asset quality, reducing the ratio of non-performing loans in the domestic market to 0.97% by the end of last year.
“Phase one [1999-2000] was needed to form the new bank,” says Corcóstegui. “The euro was coming in and we needed to give a response, so we put together the two banks to consolidate ourselves in the domestic market – to have the muscle to undertake an international expansion programme.” The efficiency gains from the streamlining of the two banks came through fast. Net profits rose 26% in 1999 and 43% in 2000 to e2.26 billion.
A phase of consolidation
After two years of aggressive growth by acquisition, the strategy in 2001 has been one of consolidation. This means rationalizing the branch networks in Spain still further – 500 branches will be closed by the end of this year – and transferring skills developed at home to the new Latin American subsidiaries. The group looks on target to reach its net profits goal of e2.86 billion and cost/income ratio target of 53% by the end of the year.
Santander Central Hispano key data*Total assets: e365.7 billion Net loans: e175.6 billion Net profits: e1.4 billion Market capitalization: e48.8 billion Number of branches: 10,302 Worldwide staff: 120,892 S&P rating: A+/Negative/A-1 Headquarters: Madrid Customers: 32 million in 42 countries Shareholdings: Royal Bank of Scotland: 9.5% Société Générale: 5.9% Commerzbank: 4.8% Sanpaolo IMI: 6.4% *September 2001
Analysts had expected this year’s objectives to be set as part of a two-year merger plan at the start of the year, but in the end Programa Dos was not revealed until June. Goals were set for the second half of 2001, as well as 2002 and 2003 and the decision was also taken to merge the brand names into a single logo. The bank’s former communications director, Luis Abril, says Programa Dos was not launched earlier because there was an “excess of conservatism” with directors wanting to “take their time to digest decisions”. Abril played a central role in the hostilities between the two camps that were sparked by arguments over branding and he was ousted this summer.
Corcóstegui now explains the timing of the decision to merge brands not as relating to this internal struggle but in terms of minimizing cost: “The multi-brand strategy has allowed the bank to increase market share in every product at a time when the market was growing very fast. Right now the market is not growing so fast so it’s the perfect time to launch the new brand name without losing market share.”
Santander Central Hispano achieved significant economies of scale by putting the two banks together while maintaining the multi-brand strategy. With the fashion now swinging against creation of single monolithic brands the move is not risk-free. And it seems certain to result in some loss in market share. But analysts feel this should be a lot less than it might have been two years ago. “There is less risk of losing clients if the names are kept while the integration of systems is being undertaken,” says Juan Berberana, analyst at Fortis Bank.
Analysts at Ibersecurities believe that with the bank’s stated goal now being cost reduction, it doesn’t make sense to keep a multi-brand strategy. Corcóstegui also explains that the decision was taken at the appropriate time for the bank’s staff: “Today is the optimum time to merge the brands. Two years ago people were more defensive – it takes a while for people to feel happy about sharing a name with a bank that has been a competitor for years. I would do it again the second time around.”
The integration of brands does not for the moment include Banesto, the Spanish banking group in which Santander Central Hispano has a 97.3% stake. Fortis’s Berberana therefore reckons that the plan is not as comprehensive as it should be. Santander Central Hispano may be tempted to offer a high premium to acquire the shares in Banesto that it does not yet own.
Programa Dos may excite the technocrats inside the banks but the markets were less enthused when it was announced. “The market did not react very strongly, partly because it was depressed by Argentina and also because of the general lack of liquidity,” says Morgan Stanley banking analyst Alejandro Ruyra. At the time the bank’s internal feuding was also becoming more public. It wasn’t until mid September that the new, young communications and research director, Juan Manuel Cendoya, was able to unveil the new group logo.
What had been decided was that the BSCH acronym, which had been adopted since the merger in 1999, had been a mistake. Customers felt that BSCH was difficult to remember and difficult to pronounce, according to Cendoya. Botín was said to be unhappy with the fact that BSCH was easily confused with HSBC, the Hongkong&Shanghai Banking Corporation.
A punchy alternative has proved elusive, leaving Santander Central Hispano – an even longer mouthful – as the final choice. Retaining the names of the two merged banks in the title means the new group will continue to be associated with Santander, which represents dynamism, and Central Hispano, which represents solidity and confidence, says Corcóstegui. “We want the name Santander Central Hispano to be used without shortening or abbreviation,” stresses Cendoya. Yet this may be a disingenuous expectation. The group’s red logo is almost identical to that of the old Banco Santander. Many feel that the words Central Hispano trailing at the end will soon be forgotten by headline writers and consumers. Botín’s former merger partner will have seen its identity erased.
After its first phase of integration, the bank still lags behind its main Spanish rival, Banco Bilbao Vizcaya Argentaria (BBVA), in terms of efficiency. Its efficiency ratio for the first half of 2001 was 54% compared with BBVA’s 51.2%. Corcóstegui is keen to tackle cost control throughout the group. “It is not a fashion, it is a requirement,” he says. “The percentage of income devoted to costs was 62% in 1998 which we considered very high, although it’s not high by European standards. This year we expect it to be 53% and the objective for 2003 is 45%, implying tough cost control.” This means cutting down on labour: “Cutting costs means substituting manpower for technology. Five to six employees per branch is about the efficient level in Spain and we are getting pretty close to this.”
Still, Santander Central Hispano sees itself as at the forefront of innovation in Spanish banking. Alongside its branch closures the bank has also been investing in telephone banking – more heavily than any other large Spanish bank, according to S&P. It is already taking advantage of Patagon, a global financial website acquired last year, to develop business-to-business and business-to-consumer projects. Iberian customers are still way behind most European counterparts in their use of banking channels other than ATMs. But Santander Central Hispano is ready and waiting to offer them a range of multi-channel banking services when they catch up.
For Corcóstegui, improving efficiency also means giving priority to staff development. “We are doing banking a different way now than we were 10 years ago and we will be doing it differently again in 10 years’ time. It’s important that the human capital of the group is prepared for that change.” The plan is to cut total group costs by e900 million over the next two years. Most of these savings will come from branch closures, which Corcóstegui confirms will occur mainly in Spain – with a few in Venezuela after the merger of Banco Caracas and Banco Venezuela. But he also hopes to cut costs by improving synergies, and this should be made easier under the single-brand bank, which has been segmented into consumer and wholesale clients.
Santander Central Hispano projects annual earning per share growth of 20% for 2002 and 2003. But it has felt it wise to assure shareholders that it won’t be making any capital increases in the near future. “We are satisfied with the diversification of our holdings – we are not pursuing any big investments in the next few months,” says Corcóstegui. The bank aims for a growth in net profits of e4.2 billion in two years. That figure looked realistic despite the economic slowdown in Spain and worldwide until this month’s terrorist attacks in the US injected a new wave of uncertainty.
Cost-cutting, not a revenue push
“The important point to be made on the bank’s financial objectives for 2002 and 2003 is that they are exclusively based on the back of cost reductions and not on aggressive revenue increases,” says Ibersecurities banking analyst Vicente González. He believes that the bank should have no trouble achieving a BIS capital ratio of 12% by the end of 2003, assuming the bank doesn’t undertake any acquisitions in the short and medium term.
Corcóstegui stresses: “The objectives were based on very conservative growth estimates. Our objective of 20% growth in EPS is not based on illusions about earnings revenues but on very tough numbers on cost control.”
So far management has met the targets it has set. But, with the economic mood now much more sober, the bank’s heavy investment in the volatile Latin America markets looks more of a gamble.
Through its recent acquisitions the bank has increased its overall exposure to Latin America to around 37%. Even the bank’s supporters hint that this is excessive. At least the bank has the consolation of knowing that this level of exposure was chosen deliberately as part of a global strategy.
Latin America accounts for over a third of the group’s assets and profits. Its investments place emphasis on acquiring majority stakes, installing its own managers and standardizing products. “We are very happy with the level of exposure to Latin America,” says Corcóstegui. “We have invested in the last two years and the
banks themselves are growing in business and in profits. We are very satisfied with our investments.”
The bank is adamant that it will back its Argentine subsidiary to the hilt: “We have a lot of faith in Argentina. We are giving a lot of support to the government and the economic team and we believe that we have to give them the opportunity to develop this zero deficit programme,” insists Corcóstegui. It’s subsidiary, Banco Real, is said to be a very liquid bank with decent credit risk management and very strong capital ratios. The bank’s non-performing loan ratio has actually been improving throughout the year – dropping from 4.65% in December 2000 to 4.03% in June 2001.
Corcóstegui’s position as CEO was reconfirmed at the merger relaunch in June. The move to maintain a crucial role for the former CEO of Banco Central Hispano was intended to steady confidence – Botín would oust his co-chairman, José María Amusátegui, a few weeks later.
Corcóstegui’s style is thoughtful, almost academic. He believes the group should continue to concentrate on those areas where it has already built up a franchise, such as retail banking, which accounted for 59% of the bank’s net profits in the first half of 2001. He has no illusions that Santander Central Hispano can compete with the big investment banks and he is realistic about where it should concentrate its efforts: “We don’t want to become a big wholesale bank. But where we have a strong franchise, like in Portugal, Brazil and Mexico, we will optimize our position. We will concentrate on the markets where we think we can make money.”
If Banco Central Hispano has effectively lost the battle to retain its name post-merger, it has shaped the culture of the merged bank. Unlike the pre-merger Santander bank which adopted a short-term buy-and-sell strategy to optimize capital gains, Santander Central Hispano has followed a longer-term investment strategy, one much more like that of BCH. “We are going to maintain our industrial holdings,” says Corcóstegui. “The chairman and I and the board of directors have decided that. We have a good, well-diversified portfolio of industrial holdings. We are satisfied as the profitability of these businesses is very high.” The bank’s investments include holdings in energy group Union Fenosa (10.38%), oil company Cepsa (19.9%) and builder Dragados (20.19%). Approximately 63% of the industrial portfolio is in telecommunications companies, including a 1.62% stake in Vodafone.
Uncertain future in Europe
But what of the future of Santander Central Hispano in European banking? If pan-European banking were to take off, this institution would be ideally placed to pioneer the process. But, the chances for progress are not good. There is a general view that cross-border holdings are quite difficult to operate for political reasons and are sometimes hobbled by central banks. “For the time being, we have reached a standstill,” says Morgan Stanley’s Ruyra. “Overall they haven’t proved as useful as people expected.”
Corcóstegui does not expect Santander Central Hispano to lead a further wave of European cross-border acquisitions. “At the moment it is very difficult to understand the economies of scale of putting together retail banks in Europe,” he admits, adding that the arrival of euro notes and coins will certainly speed up things in the consumer market. “Merging banks in Europe does not make economical sense and part of the reason is because it doesn’t make sense culturally.
“The future of pan-European banks has not been written yet. We are very pragmatic – if we do anything in the future it will be in the interests of our shareholders,” Corcóstegui concludes.
